UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
| |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20022005 or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
| |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Periodtransition period from to .
COMMISSION FILE NUMBER
Commission file number 0-25890
CENTURY BUSINESS SERVICES,
CBIZ, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 22-2769024
- -------------------------------------------- --------------------------------------------
(State | | |
Delaware
(State or other jurisdiction (IRSOther Jurisdiction
of Incorporation or Organization) | | 22-2769024
(IRS Employer
of incorporation or organization)
Identification No.)
6480 ROCKSIDE WOODS BOULEVARD SOUTH,
SUITE 330
CLEVELAND, OHIO 44131
- -------------------------------------------- --------------------------------------------
(Address |
|
6050 Oak Tree Boulevard, South
Suite 500
Cleveland, Ohio
(Address of principal executive offices) (ZipPrincipal Executive Offices) | |
44131
(Zip Code) |
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 447-9000
SECURITIES REGISTERED PURSUANT TO SECTIONRegistrant’s Telephone Number, Including Area Code 216-447-9000
Securities registered pursuant to Section 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTIONof the Act: None
Securities registered pursuant to Section 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Name of Each Exchange on Which Registered:
The Nasdaq Stock Market
the Act:
| | |
Common Stock, par value $0.01
(Title of class) | | Nasdaq National Market
(Name of exchange on which registered) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the precedingproceeding 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]x No [ ]
o
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'sregistrant’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]
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [X]o No [ ]
x
The aggregate market value of the voting stock held by non-affiliates of the Registrantregistrant was approximately $308.4$301.2 million as of June 28, 2002. 30, 2005.
The number of outstanding shares of the Registrant'sregistrant’s common stock is 95,409,243 shares75,673,787 as of March 24, 2003.
February 28, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative
to the 2003 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration statements.
CENTURY BUSINESS SERVICES, | |
| Part III | Portions of the Registrant’s Definitive Proxy Statement relative to the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year. |
CBIZ, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
2005
Table of Contents
PAGE
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| | | | | |
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| | | Business | | | 3 | |
| | | Risk Factors | | | 9 | |
| | | Unresolved Staff Comments | | | 13 | |
| | | Properties | | | 13 | |
| | | Legal Proceedings........................................... Proceedings | | | 13 | |
| | | Submission of Matters to a Vote of Security Holders......... Holders | | | 13 | |
|
| | | | | | |
| | | Market for Registrant'sRegistrant’s Common Stock andEquity, Related Stockholder Matters..................................................... 14
Matters and Issuer Purchases of Equity Securities | | | 13 | |
| | | Selected Financial Data..................................... Data | | | 15 | |
| | | Management’s Discussion and Analysis of Financial Condition and Results of Operations................................... Operations | | | 16 | |
| | | Quantitative and Qualitative InformationDisclosures About Market Risk........................................................ 26
Risk | | | 34 | |
| | | Financial Statements and Supplementary Data................. 26
Data | | | 34 | |
| | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 26
Disclosure | | | 34 | |
| | | Controls and Procedures | | | 34 | |
| | | Other Information | | | 35 | |
| | | Management’s Report on Internal Control Over Financial Reporting | | | 35 | |
|
| | | | | | |
| | | Directors and Executive Officers of the Registrant.......... 27
Registrant | | | 36 | |
| | | Executive Compensation...................................... 30
Compensation | | | 39 | |
| | | Security Ownership of Certain Beneficial Owners and Management.................................................. 30
Management and Related Stockholder Matters | | | 39 | |
| | | Certain Relationships and Related Transactions.............. 30
Transactions | | | 39 | |
| | | Principal Accounting Fees and Procedures..................................... 31
Services | | | 40 | |
|
| | | | | | |
| | | Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31
| | | 41 | |
| EX-3.5 Name Change |
| EX-21.1 Subsidiaries |
| EX-23 Consent |
| EX-31.1 Certification 302 - CEO |
| EX-31.2 Certification 302 - CFO |
| EX-32.1 Certification 906 - CEO |
| EX-32.2 Certification 906 - CFO |
2
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
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. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS ANNUAL REPORT TO "WE" Unless the context otherwise requires, references in this Annual Report to “we”, "OUR"“our”, "CBIZ"“us”, OR THE "COMPANY" SHALL MEAN CENTURY BUSINESS SERVICES, INC.“CBIZ”, A DELAWARE
CORPORATION, AND ITS OPERATING SUBSIDIARIES.
or the “Company” shall mean CBIZ, Inc., a Delaware corporation, and its operating subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year which ends on December 31.
Available Information
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. Our website is located at http://www.cbiz.com. 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 with the U.S. Securities and Exchange Commission (SEC). The public may read and copy materials we file (or furnish) with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, and may obtain information on the operations of the Public Reference Room by calling the SEC at1-800-732-0330. In addition, the SEC maintains an internet site that contains reports, proxy and information statements and other information about us at http://www.sec.gov. 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.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
Overview
CBIZ is a diversified services company which, acting through its subsidiaries, provides professional outsourced business services primarily to small and medium-sized businesses of various sizes, as well as individuals, governmental entities and not-for-profit enterprises throughout the United States and Toronto, Canada. CBIZ provides solutions that enable our clients to better manage their finances, employees and technology. CBIZ delivers its integrated services through the following three practice groups: - Accounting, Tax and Advisory, (formerly known as the Business Solutions
Group);
- Benefits and Insurance;Insurance, and
- National Practices which includes CBIZ providesMedical Management Professionals.
CBIZ’s mission is:
| | |
| • | to enable our clients to grow and prosper by providing them with superior services and products; |
|
| • | to provide a professionally rewarding career for our employees; and |
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| • | to create shareholder value. |
CBIZ built its professional services business through 59 business units with more than 160 offices
located in 33 states, Washington D.C.,acquiring accounting, benefits, technology, valuation and Toronto, Canada. Included in this
total,other service firms throughout the United States. CBIZ’s growth strategy consists of three major components: internal growth, successfully cross-serving current clients, and managed within the National Practice group, is the Company's medical
practice management business unit which has 73 offices.
CBIZ's goalacquisitions. During 2005, CBIZ acquired three businesses that enhance our investment advisory, valuation and accounting, tax, and advisory services. Our intention is to be the leading provider of outsourced business services
within its target markets by providing clients with a broad range of
high-quality products and services; expanding locally through internal growth;
and through cross-severing. CBIZ initiated an acquisition program in November
1996 to expand its operations in the professional outsourced business services
industry. Since that time, CBIZ has acquired the businesses of 147 companies,
one of which was acquired in October 2002 and another of which was acquired in
January 2003. While we acquired only one business in 2002, it remains our
intentioncontinue to selectively acquire businesses with complementary servicesservice offerings in our target markets.
Formed as a Delaware corporation in 1987 under the name Stout
Environmental, Inc.,
History
CBIZ was acquired by Republic Industries, Inc.incorporated in 1992. In
April 1995, Republic spun off its hazardous waste operations, including CBIZ's
predecessor company, to stockholders. Re-named Republic Environmental Systems,
Inc., CBIZ's common stock began trading on the Nasdaq National Market under the
symbol "RESI." On June 24, 1996, the trading symbol changed to "IASI"Delaware 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." This name change signaled our move away from the hazardous waste
business. CBIZ divested all remaining hazardous waste operations in 1997.1987. On December 23, 1997, CBIZ changed its name to Century“Century Business Services, Inc.” and began trading under the symbol "CBIZ."
CBIZ'S PRINCIPAL EXECUTIVE OFFICE IS LOCATED AT 6480 ROCKSIDE WOODS BLVD.,
SOUTH, SUITE 330, CLEVELAND, OHIO 44131 AND ITS TELEPHONE NUMBER IS
216-447-9000.
BUSINESS STRATEGY
CBIZ's“CBIZ.” Effective August 1, 2005, after approval by our Board of Directors and shareholders, CBIZ changed its corporate name from “Century Business Services, Inc.” to “CBIZ, Inc.” CBIZ believes that this name change is integral to promoting greater name recognition in the marketplace, and to reinforcing our image as a unified provider of professional business services.
Business Strategy
CBIZ’s business strategy is to grow in the professional 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
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| • | offering a wide array of professional business services; |
|
| • | cross-serving these services to our existing client base; |
|
| • | attracting new clients with our diverse business services offerings; and |
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- leveraging our practice area expertise across all our businesses; and
- developing our core service offerings in target markets through selective
acquisitions.
| | |
| • | developing our core service offerings in target markets through internal growth and selective acquisitions. |
Providing a range of outsourced business services to a client results in advantages for both the client and for CBIZ. DealingWorking with one provider for several tasks saves the client the time of having to dealcoordinate with multiple vendors. For example, the employee data used to process payroll can also be used by CBIZ
as a groupCBIZ health and welfare insurance agent and benefits consultant to provide an appropriate benefits package to a client'sclient’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 opportunities. The ability to combine several services and offer them through one trusted provider distinguishes CBIZ from other outsourced service providers.
CBIZ is looking to strengthen our operations and customer service capabilities by making selective acquisitions that are complementary in markets where we currently
operate and where the prospects are favorable to increasebuilding out our market share and
become a significant provider of a comprehensive range of outsourced business
services. CBIZ'sservice offerings in target markets. CBIZ’s strategy is to acquire companies that generally:
- have a strong potential for cross-serving among CBIZ's subsidiaries;
- can integrate quickly with existing CBIZ operations;
- have strong and energetic leadership;
- are accretive to earnings; and
- help complete the core CBIZ service offering in a geographical market.
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| • | have a strong potential for cross-serving to CBIZ’s clients; |
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| • | can integrate quickly with existing CBIZ operations; |
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| • | have strong and energetic leadership; |
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| • | are accretive to earnings; and |
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| • | help enhance the core CBIZ service offering in a geographical market. |
In accordance with our strategy to deliver services to clients conveniently,locally and to promote cross-serving between our various service groups, CBIZ consolidates office locations wherever practical. Since 2000,2001, CBIZ consolidated offices in Atlanta, Boca Raton, Chicago, Cleveland, Columbus, Dallas, Denver, Kansas City, Los Angeles, Minneapolis, Orlando, Minneapolis,Philadelphia, Salt Lake City, San Diego, San Jose, St. Louis San Ramon, and Philadelphia.Tucson. CBIZ will
continue to combinemay consolidate additional offices with a consolidation planned for Kansas Citylocations in mid-2003the future, and other potential consolidations to occur later. As further
consolidations occur, the Companythus may incur additional costs associated with thesesuch consolidations.
OUTSOURCED BUSINESS SERVICES
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'sCBIZ’s Accounting, Tax and Advisory ("ATA")(ATA) group offer services in the following areas: cash flow management; strategic planning; consulting; record-keeping;
federal, state and local tax return preparation, planning and consulting for individuals, corporations, partnerships, estates and trusts; strategic planning; consulting; record-keeping and financial statement 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;
outsourcedfinancial staffing services including chief financial officer services and other financial staffing services; financial investment analysis; succession, retirement, and estate planning; andcash flow management; profitability, operational and efficiency enhancement consulting to a number of specialized industries. Other thanindustries; litigation support services; internal audit services,services; and Sarbanes-Oxley consulting and compliance services.
Restrictions imposed by independence requirements and state accountancy laws and regulations preclude CBIZ does not currently offerfrom rendering audit and attest services does not intend to offer(other than internal audit and attest services in the future and does not purchase the "audit and
attest practices" of any accounting business it acquires. However,services). As such, CBIZ and its subsidiaries maintain joint-referral relationships and administrative service agreements (ASAs) with independent licensed Certified Public Accounting or CPA(CPA) firms under which audit and attest services may be provided to CBIZ's clients.
CBIZ’s clients by such CPA firms. These firms are owned by licensed CPAs, a vast majority of whom are also employed by CBIZ subsidiaries.
Under these service agreements with licensed CPA firms,ASAs, CBIZ subsidiaries
provideprovides a range of services to the CPA firms, including (but not limited to): administrative services, includingfunctions such as office management, bookkeeping, accounting and other administrative services; prepareaccounting; preparing marketing and promotion materials; providing office space, computer equipment, and leasesystems support; and leasing administrative and professional staffstaff. Services are performed in exchange for a fee. Non-attestFees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of operations and amounted to approximately $69.0 million, $46.3 million, and $39.8 million for the years ended December 31, 2005, 2004 and 2003, respectively, a majority of which is related to services rendered to privately-held clients. In the event that accounts receivable and unbilled work in process become uncollectible by the CPA firms, the service fee due to CBIZ is reduced on a pro-rata basis. The ASAs typically have terms ranging up to ten years, and are renewable upon agreement by both parties.
With respect to CPA firm clients that are required to file audited financial statements with the SEC, the SEC staff views CBIZ and the CPA firms with which we have contractual relationships as a single entity in applying
4
independence rules established by the accountancy regulators and the SEC. Accordingly, we do not hold any financial interest in an SEC-reporting attest client of an associated CPA firm, enter into any business relationship with an SEC-reporting attest client that the CPA firm performing an audit could not maintain, or sell any non-audit services include anyto an SEC-reporting attest client that the CPA firm performing an audit could not maintain, under the auditor independence limitations set out in the Sarbanes-Oxley Act of 2002 and other professional accountancy independence standards. Applicable professional standards generally permit the ATA practice group to provide additional services other thanto privately-held companies, in addition to those services which only licensed certified public accountants, licensed public accountants,
or licensedmay be provided to SEC-reporting attest clients of an associated CPA or PAfirm. CBIZ and the CPA firms may performwith which we are associated have implemented policies and procedures designed to enable us to maintain independence and freedom from conflicts of interest in accordance with accountancy laws.
Under these agreements, each party has agreedapplicable standards. Given the pre-existing limits set by CBIZ on its relationships with SEC-reporting attest clients of associated CPA firms, and the limited number and size of such clients, the imposition of Sarbanes-Oxley Act independence limitations did not and is not expected to materially affect CBIZ revenues.
The CPA firms with which CBIZ maintains ASAs operate as limited liability companies, 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 itstheir 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 currently undergoes an annual peercan not perform audits or reviews, does not contract to perform them and does not provide audit or review administeredreports. Given this legal prohibition and course of conduct, CBIZ does not believe it is likely that we would bear the risk of litigation losses related to ensure complianceattest services provided by the CPA firms.
At December 31, 2005, CBIZ maintained administrative service agreements with
independence requirements in its relationships with associated9 CPA firms,
and
clients. The peer reviewwhich has
found CBIZ in compliance with these rules every
year since the review was first administered in 1999.
4
Of thedecreased from 41 CPA firms associatedduring 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 during 2002,maintains administrative service agreements decreased when a majority of the partner group
from twelvepartners of thosethe 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, Missouri. CBIZ'sKansas. MHM P.C. has approximately 200 shareholders, a vast majority of whom are also employees of CBIZ. MHM maintains a seven member Board of Directors. There are no board members of MHM P.C. who hold senior officer positions at CBIZ. CBIZ’s association with Mayer Hoffman McCannMHM P.C. offers our clients access to the multi-state resources and expertise of a national CPA firm. The advantage to CBIZ of these consolidations is a reduction in the number of different firms with which itwe maintain ASAs. Although the ASAs 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.
CBIZ'sagreements qualify as variable interest entities under FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, as amended. See further discussion in Note 1 of the accompanying consolidated financial statements.
CBIZ is also able to offer its clients access to multi-state and international resources through relationships maintained with professional organizations such as Kreston International. CBIZ joined Kreston International in the third quarter of 2005. Kreston International is an international organization of affiliated accounting firms that allows CBIZ to access accounting services in more than 70 countries around the world.
At December 31, 2005, CBIZ’s ATA practice iswas divided into four regions, representing the East, Midwest, Great Lakes, and West regions of the country.United States. Each of these regions is headed by a designated regional director, alleach of whom report to the Senior Vice President, Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory group contributed approximately $209.9$245.5 million of revenue, or 42%representing approximately 43.9% of CBIZ'sCBIZ’s consolidated annual revenue in 2002.
2005.
Benefits and Insurance Services. The business units that comprise CBIZ'sCBIZ’s Benefits and Insurance group offer services inare organized by the following areas:two groups: Retail and National Services. At December 31, 2005, the Retail group was divided into three geographical regions representing the East, Central, and West regions of the United States. Each of the retail operations provides a broad range of primarily commercial employee benefits,benefit and property and casualty insurance brokerage,services within their geographic area. Specific services provided by the Retail group during 2005 included: consulting and administration, includingbrokerage of group health and welfare plans (group health, dental, vision, life and disability programs); the design, implementation and administration of qualified retirement plans, such as profit-sharingprofit-
5
sharing plans (including 401-k plans), defined benefit plans, and money purchase plans; actuarial services;services for health and welfare benefits consulting, including group health
insuranceplans and qualified retirement plans; dentalCOBRA and vision care programs; group life insurance programs;
accidental death and dismemberment and disability programs; COBRASection 125 plan administration and voluntary insurance programs; health care and dependent care spending
accounts; premium reimbursement plans;programs for employees; communications services to educate employees about their benefit programs; executive benefits consulting on non-qualified retirement plans andplans; human capital advisory services; business continuation plans; specialty
high-risk life insurance; employee benefit worksite marketing; and wealth management services, including Registered Investment Advisory Services,
Investment Policy Statements;registered investment advisory services, investment policy statements, mutual fund selections;selections, and ongoing mutual fund monitoring. CBIZ'sIn addition, the Benefits and Insurance Services group provides some personal lines brokerage for property and casualty and individual life and health insurance.
The National Services group is comprised of several specialty operations that provide unique services on a national scale. At December 31, 2005, specific services provided by the National Services group included: brokerage services for specialty high-risk life insurance and clinical underwriting; 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.
CBIZ’s Benefits and Insurance group also provides an on-line enrollment service, CBIZSolutions.com,CBIZSolutions, that in concert with our payroll services, enables theemployers and employees of a client to access information such as health and welfare benefits, retirement fund balances and payroll information; update their
personal information;enroll for benefit plans; and access companycertain human resource documents likesuch as employee handbooks and policies.
CBIZ's
CBIZ’s Benefits and Insurance Services group maintains relationships with many different insurance carriers. Some of these carriers have compensation arrangements with CBIZ whereby some portion of payments due may be contingent upon meeting certain performance goals, or upon CBIZ providing client services that would otherwise be provided by the carriers. These compensation arrangements are provided to CBIZ as a result of our performance and expertise, and may result in enhancing CBIZ’s ability to access certain insurance markets and services on behalf of CBIZ clients. The aggregate of these payments received during the years ended December 31, 2005 and 2004 was less than 2% of consolidated CBIZ revenue for the respective periods.
State insurance regulators have conducted inquiries to clarify the nature of compensation arrangements within the insurance brokerage industry. To date, CBIZ, along with other major insurance brokerage companies, has received requests for information regarding our compensation arrangements related to these practices from such authorities. In addition to inquiries from various states’ insurance departments, CBIZ has received subpoenas from the New York Attorney General, the Connecticut Attorney General, and the Ohio Department of Insurance regarding its insurance brokerage compensation arrangements. CBIZ is cooperating fully in each inquiry. CBIZ has discussed the nature of these inquires and compensation arrangements with each of the major insurance carriers with whom we have established these arrangements. We believe that our arrangements are lawful and consistent with industry practice, and we expect that any changes to compensation arrangements in the future will have a minimal impact on CBIZ, barring future regulatory action. Future regulatory action may limit or eliminate our ability to enhance revenue through all current compensation arrangements, and may result in a diminution of future revenue from these sources.
CBIZ’s Benefits and Insurance Services group operates under one Senior Vice President, who oversees the three regional divisionsretail regions and their respective regional directors, representingas well as each of the Eastern, Central, and Western states. Additionally, CBIZ
operates wholesale insurance and other specialty insurance divisions, which also
report directly to CBIZ's Senior Vice President of Benefits and Insurance
Services.National Services companies. The Benefits and Insurance group contributed approximately $150.5$146.2 million of revenue, or 30%representing approximately 26.1% of CBIZ'sCBIZ’s consolidated annual revenue in 2002.
2005.
National Practices. The At December 31, 2005, the business units that comprise CBIZ'scomprised CBIZ’s National Practices group offeroffered services in the following areas: payroll processing and administration; valuation services including financial valuations, of commercial, tangible and intangible assetsasset valuations and financial securities;litigation support services; mergers and acquisitions and capital advisory services; health care consulting; government relations; process improvement; and information technology consulting, including strategic technology planning, project management, development, network design and implementation, and software selection and implementation, and voice over internet protocol consulting and implementation. CBIZ's medical practice management business,
CBIZ’s wholly-owned subsidiary, CBIZ Medical Management Professionals
("CBIZ MMP")(CBIZ MMP), is
also 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 $143.9 million of
revenue, or 29% of CBIZ's annual revenue, in 2002. Included in the results of
the National Practices group are those of CBIZ MMP, which contributed
approximately $66.2 million of revenue, or 13% of CBIZ's annual revenue, in
2002.
CBIZ MMP. CBIZ's wholly-owned subsidiary,group. CBIZ MMP, provides
coding and billing
and
practiceas well as full-practice management services
tofor hospital-based
medical practices primarily in
the specialties ofphysicians practicing anesthesiology,
pathology, radiology, emergency medicine,
pathology, and
radiology.other areas. CBIZ
MMP'sMMP’s billing services include: billing and accounts receivable management;
codingclaims processing and
automated claims filing;collection; comprehensive delinquent claims follow
up
and collections;up; compliance
plansprogramming to meet
governmental and other third partygovernment regulations;
local office management; and comprehensive statistical and operational reporting. The
financialpractice management services provided by CBIZ MMP include:
5
financial reporting, accounts payable, payroll, and general ledger processing; design of physician employment, stock and compensation arrangements; and comprehensive 6
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 evaluates other strategic business
partners;entities; identifies and coordinates practice merger and integration opportunities; and coordinates practice expansion efforts.
SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
CBIZ's key competitive factors
At December 31, 2005, the business units within the National Practices group reported to CBIZ’s President and Chief Operating Officer. The National Practices group contributed $167.6 million of revenue, representing approximately 30.0% of CBIZ’s annual revenue in attracting, retaining2005. Included in the results of the National Practices group are those of CBIZ MMP, which contributed $97.6 million of revenue, or 17.4% of CBIZ’s consolidated annual revenue in 2005.
Sales and Marketing
CBIZ’s branding strategy has historically focused on providing servicesCBIZ with a consistent image and value proposition within each of its primary geographic and industry markets. For 2005, CBIZ capitalized on those successful efforts by refining its message to clients are:
- established relationships;
- strong localreinforce the CBIZ “Client Centric” model — a more intuitive way of taking the wide array of CBIZ service offerings to market, based on the fundamental needs of businesses to manage their financial, employee and regional presence;
-technology challenges. These efforts included an evolution of the CBIZ advertising strategy, focusing on our three primary service offerings: employee management; financial management; and technology, as well as the development of a revised web presence, new collateral materials, and the introduction of several new direct marketing ande-marketing vehicles. The Client Centric model was also used as a basis to begin to better understand and define each client’s unique areas of need and decision making authority, through the use of our proprietary database, CNECT. This level of client information will prove strategically important for revenue generation as it enhances CBIZ’s ability to match client requirements with available services;
-identify the most appropriate cross-serving opportunities.
Beyond branding, a major marketing initiative was undertaken to enhance CBIZ’s targeted marketing capabilities. While it is CBIZ’s intent to continue to foster the entrepreneurial spirit of our offices by allowing each practice area and locality to execute their local marketing plan, CBIZ has significantly increased our ability to offerprovide offices with a numberhost of services from one provider;highly targeted marketing tools, support, and - the abilitystrategies 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 maximize
ourbetter capitalize on market penetration. CBIZ expects that we can cross-serve new productsopportunities in selected industries 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 base as cross-serving. Because cross-serving is most effective
when it makes outsourcing more convenient for the client, the location of the
service provider is a key consideration, and requires marketing functions to be
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, is developing 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 and is accountable
for its own performance, marketing planning and resources are coordinated
nationally.practice areas. These resourcestools 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 is developing a
centralized client database, "CNECT", which we expectcontinues to have fully implemented
by year-end 2003. CNECT will support marketing efforts such as improved client
service, newbe focused on creating business development tools and product development. New clients are
generated primarily through networking, referrals from existing clients and
participation in trade shows.
The Company maintainsprograms on a joint marketing agreement with HarborView Partners
(HarborView), a Stamford, Connecticut-based provider of internal audit and
business advisory services. Undernational level that can be easily customized for use at the terms of the agreement, CBIZ is the
exclusive provider of professional staff to HarborView Partners to conduct
internal audits for engagements that HarborView Partners secures within the
United States. This agreement was entered into to capitalize on the SEC's
auditor independence rules prohibiting independent auditors from providing
internal audit services to their publicly traded audit clients. CBIZ's
relationship with HarborView will also allow us to better utilize our ATA
personnel during non-peak periods.
CUSTOMERS
local level.
Customers
CBIZ provides professional
outsourced business services to
over 65,000approximately 80,000 clients.
CBIZ'sCBIZ’s clients
typically have fewer than 500 employees and prefer to focus their resources on
their own operational competencies while
outsourcing non-coreutilizing CBIZ to provide various administrative
functions to CBIZ. Outsourcingfunctions. Reducing 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'sclient’s size and capabilities, it may choose to utilize some or many of
CBIZ'sCBIZ’s broad array of
services, which it typically accesses initially through its original CBIZ
representative.
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CBIZ'sservices.CBIZ’s clients come from a large variety of industries and markets.markets, and no single client individually comprises more than 3.0% of our total consolidated revenue. Edward Jones, a financial services firm and client of CBIZ Network Solutions for electronic networking and information services, is our largest client and contributed approximately 3.6%2.6% of the Company'sCBIZ’s consolidated revenue in 2002. No other single customer individually
comprises more than 3% of CBIZ's total consolidated revenue.2005. Management believes that such diversity helps insulate CBIZ from a downturn in a particular industry. Nevertheless, economic conditions among selected clients and groups of clients may have an impact on the demand for such services.
COMPETITION
Competition
The professional outsourced business services industry is highly fragmented and competitive, with a majority of industry participants, such as accounting, employee benefits, payroll firmsproviders or professional employeeservice 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 operatorsprofessional services firms and a large number of relatively small independent operatorsfirms in local markets. CBIZ'sCBIZ’s competitors in the professional outsourced business services industry include, but are not limited to, independent consulting services companies, independent accounting and tax firms, payroll service providers, independent insurance brokers and divisions of diversified enterprises,
insurance brokersservices companies.
7
Acquisitions and banks.
ACQUISITIONS AND DIVESTITURES
Acquisitions are an important part of our strategy. Divestitures
CBIZ is lookingseeks to strengthen ourits operations and customer service capabilities by makingselectively acquiring businesses that are complementary in building out our service offerings in our target markets. During 2005, CBIZ acquired three businesses including a registered investment advisory firm in Cleveland, Ohio, an accounting and consulting practice in San Diego, California, and a valuation firm in Milwaukee, Wisconsin. In addition, CBIZ acquired two client lists which complement our Accounting, Tax and Advisory and Benefits and Insurance practices.
In January 2006, CBIZ completed the acquisitions of two companies: The TriMed Group is located in markets where we currently operateFlint, Michigan and whereprovides medical billing services and in-house computer systems primarily to hospital-based physician practices; and Valley Global Insurance Brokers is a property and casualty insurance broker located in San Jose, California.
In 2005, CBIZ sold a business operation from the prospects are
favorableBenefits and Insurance practice group and closed an operation from the Accounting, Tax and Advisory practice group. In addition, CBIZ committed to increase our market share and become a significant providerthe divestiture of a comprehensive range of outsourced business services. In October 2002, CBIZ
acquired a benefits and insurance firm locatedunit from the National Practices — Other practice group which is expected to be completed in the Maryland area.
In 2002, CBIZ sold, closed, or committed to sale sixteen operating entities2006. These divestitures were made in orderan on-going effort to rationalize itsour business operations by divesting businessof units that were either underperforming,under-performing, 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'sCBIZ’s plan to focus on metropolitan markets in which we can strengthen our ATA and Benefits & Insurance
core service offerings. Going forward,In the future, CBIZ may from time to time divest of additional business operations and thus may recognize additional gains and/or losses on divestitures.
REGULATION
CBIZ's
Regulation
CBIZ’s operations are subject to regulations by federal, state, and local governing bodies. Accordingly, our outsourced business services may be impacted by legislative changes by these bodies, particularly with respect to provisions relating to payroll, benefits administration and insurance services, pension plan administration, tax and accounting. CBIZ remains abreast of regulatory changes affecting our business, as these changes often affect clients'
proceduresclients’ 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 proceduresactivities comply with revised regulations.
CBIZ itself is subject to industry regulation and changes, within it, including changes in laws, regulations, and codes of ethics governing theits accounting, industry,insurance, valuation, registered investment advisory and broker-dealer operations, as well as in other industries, the interpretation of which may restrict CBIZ'sCBIZ’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'sCBIZ’s operations, or that CBIZ does not believe it
will be ableour ability to comply with.
with such existing or proposed regulations.
CBIZ is subject to certain privacy and information security laws and electronic-data
provisions ofregulations, including, but not limited to those under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA")(HIPAA), The Financial Modernization Act of 1999 (the Gramm-Leach-Bliley Act), and correspondingother provisions of federal and state law which may restrict CBIZ'sCBIZ’s operations and give rise to expenses related to compliance. On July 30, 2002, President George W. Bush signed into lawCBIZ is currently in compliance with such laws and regulations, and expects to remain in compliance in future periods.
As a public company, CBIZ is subject to the provisions of 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
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CFOs to certify that company financial statements fairly present the company's
financial condition.; (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 2002, and believes it will be in
compliance with each of the foregoing requirements that become effective in
future periods.
LIABILITY INSURANCE
requirements. Liability Insurance
CBIZ carries policies including those for commercial general liability, automobile liability, property, crime, professional liability, directors and officers liability, fiduciary liability, employment practices liability and workers'workers’ compensation subject to prescribed state mandates. Excess liability coverage is carried over the underlying limits provided by the commercial general liability and automobile liability policies.
EMPLOYEES
Employees
At December 31, 2002,2005, CBIZ employed approximately 4,9004,700 employees, approximately half of whom are professionals. The Companyhold professional certifications or degrees. CBIZ believes that it has a good relationship with its employees. CBIZ realizesbelieves that as a professional services company that differentiates itself from competitors through the quality and
8
diversity of our service offering,offerings, the Company'sCompany’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
Seasonality
A disproportionately large amount of CBIZ'sCBIZ’s revenue occurs in the first half of the year. This is due primarily to the Company'sour accounting and tax practice, which is subject to seasonality related to the heavy volume in the first four months of the year. CBIZ'sCBIZ’s ATA group generated approximately 44%42% of its revenue in the first four months of 2002.2005. Like most professional service companies, most of CBIZ'sCBIZ’s operating costs are relatively fixed in the short term, resulting in much higher operating margins in the first half of the year.
PROPERTIES
CBIZ's corporate headquarters are located at 6480 Rockside Woods Blvd.,
South, Suite 330, Cleveland, Ohio 44131, in leased premises. Some
Uncertainty 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 33 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
Forward-Looking Statements
This Annual Report contains
"forward-looking statements"“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“Business and
Properties"Properties” and
"Management's“Management’s Discussion and Analysis of Financial Condition and Results of
Operations"Operations” regarding
CBIZ'sCBIZ’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“intends,” “believes,” “estimates,” “expects,” “projects,” “anticipates,” “foreseeable future,
"
"seeks,"” “seeks,” and words or
phasesphrases of similar import in connection with any discussion of future operating or financial
8
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 20022005 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“Item 1A. Risk Factors” will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. ActualOur 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-Kthe quarterly, periodic and 10-Kannual reports towe file with 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 listeddescribed here could also adversely affect operating or financial performance. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
RISK FACTORS
Item 1A. 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.
A reversal of or decline in the current trend of outsourcing business services may have a material adverse effect on our business, financial condition and results of operations.
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 have a material adverse effect on our business, financial condition and results of operations.
WE MAY BE MORE SENSITIVE TO REVENUE FLUCTUATIONS THAN OTHER COMPANIES, WHICH
COULD RESULT IN FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK.
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 related costs, depreciation and rent, are relatively fixed in the short 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 could result in losses for the applicable quarters. Additionally, the general condition of the United States economy and the current weakness in the economy,
has and will continue to affect our business. Potential new clients may defer from switching service providers in light of thesewhen they believe economic conditions.conditions are unfavorable. Any of these
9
factors could cause our quarterly results to be lower than expectations of securities analysts and shareholders, which could result in a decline in the price 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.
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 collectible.
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 ability of customers to pay amounts due. We
accrueprovide 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.
9
WE ARE DEPENDENT ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY
EMPLOYEES.
We are dependent on the services of our executive officers and other key employees, the loss of any of whom may have a material adverse effect on our business, financial condition and results of operations.
Our success depends in large part upon the abilities and continued services of our executive officers and other key employees, such as our business unit presidents. In the course of business operations, employees may resign and seek employment elsewhere. Certain principal employees, however, are bound in writing to non-compete agreements barring competitive employment, client solicitation, and solicitation of employees for a period of between two and ten years following his or her resignation. We cannot assure you that we will be able to retain the services of our key personnel. If we cannot retain the services of key personnel, there could be a material adverse effect on our business, financial condition and results of operations. While we generally have employment agreements and non-competition agreements with key personnel, courts are at times reluctant to enforce such non-competition agreements. In addition, many 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 remain with us. In order to support our growth, we willintend to continue to effectively recruit, hire, train and retain additional qualified management personnel. Our inability to attract and retain necessary personnel could have a material adverse effect on our business, financial condition and results of operations.
RESTRICTIONS IMPOSED BY INDEPENDENCE REQUIREMENTS AND CONFLICT OF INTEREST
RULES MAY LIMIT THE CLIENTS WE SERVICE AND THE ABILITY OF THE ATTEST FIRMS
WITH WHICH WE HAVE CONTRACTUAL RELATIONSHIPS TO PROVIDE ATTESTATION SERVICES.
We do not offer
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.
Restrictions imposed by independence requirements and state accountancy laws and regulations preclude CBIZ from rendering audit and attest services other(other than internal audit services. However, weservices). As such, CBIZ and its subsidiaries maintain joint-referral relationships and administrative service agreements (ASAs) with independent licensed CPACertified Public Accounting (CPA) firms under which audit and attest services may be provided to CBIZ's clients. CBIZ’s clients by such CPA firms. These firms are owned by licensed CPAs, a vast majority of whom are employed by CBIZ subsidiaries.
Under these service agreements, we provideASAs, CBIZ provides a range of services to the CPA firms, including (but not limited to): administrative servicesfunctions such as office management, bookkeeping, and lease staffaccounting; 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. Revenue from these agreementsFees earned by CBIZ under the ASAs are recorded as revenue in the accompanying consolidated statements of operations. In the event that accounts receivable and unbilled work in process become uncollectible by the CPA firms, the service fee due to CBIZ is reflected in our financial statements.
reduced on a pro-rata basis.
With respect to attestCPA firm clients that are required to file audited financial statements with the SEC, the SEC staff views usCBIZ and the attestCPA firms with which we have contractual relationships as a single entity in applying independence rules established by the accountancy regulators and the SEC. According to the SEC staff,Accordingly, we are required to abide by all of the independence
rules that the attest firms must follow in order to be independent of an
SEC-reporting attest client. According to the SEC staff, these independence
rules prohibit us, and our officers, directors, affiliates and significant
stockholders, to the extent an attest firm is so prohibited, from:
- holdingdo not hold any financial interest in an SEC-reporting attest client;
- enteringclient of an associated CPA firm, enter into any business relationship with an SEC-reporting attest client;client that the CPA firm performing an audit could not maintain, or - sellingsell any prohibited non-audit services to an SEC-reporting attest client.
Inclient that the CPA firm performing an audit could not maintain, under the auditor independence limitations set out in the Sarbanes-Oxley Act of 2002 and other professional accountancy independence standards. Applicable professional standards generally permit the ATA practice group to provide additional services to privately-held companies, in addition under these rules, the SEC staff views an attest firm and us
as lacking independence with respect to:
- anto those services which may be provided to SEC-reporting attest client where that client, or its directors,
officers, affiliates or significant stockholders, own stock in us or our
affiliates; or
- entities involved inclients of an offering of our stock or in making a market for,
or otherwise facilitating the trading of, our stock in the secondary
market, including any entity that is a member of a syndicate 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 that employs securities analysts
that follow us.associated CPA firm. CBIZ and the attestCPA firms with which we are associated
10
have implemented policies and procedures designed to enable us to maintain independence and freedom from conflicts of interest in accordance with applicable standards.
These procedures include independence screening in connectionGiven the pre-existing limits set by CBIZ on its relationships with
the selection
ofSEC-reporting attest clients
as well as periodic confirmations of
independence by officers,
directors and professionals of usassociated CPA firms, and the
attest firms. We remain in contact
with state accountancy regulators in jurisdictions in which we operatelimited number and size of such clients, the imposition of Sarbanes-Oxley Act independence limitations did not and is not expected to
ensure
our business services model complies with independence regulations. To date, no
state accountancy regulatory
10
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.
materially affect CBIZ revenues.There can be no assurance that following the policies and procedures 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 associationsaccountancy authorities 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 the attest firms performed for SEC-reporting clients have not been material.
GOVERNMENTAL REGULATIONS AND INTERPRETATIONS ARE SUBJECT TO CHANGES.
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 future laws and regulations will provide the same or similar opportunities for us to provide business consulting and management services to businesses and individuals. State insurance regulators have conducted inquiries to clarify the nature of compensation arrangements within the insurance brokerage industry. Future regulatory action may limit or eliminate our ability to enhance revenue through all current compensation arrangements, and may result in a diminution of future insurance brokerage revenue from these sources. Accordingly, CBIZ'sCBIZ’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.
We are subject to risks relating to processing customer transactions for our payroll, medical practice management, property tax management, and other transaction processing businesses.
The high volume of client funds and data processed by us in our payroll and certain
othertransaction related businesses entails risks for which we may be held liable if the accuracy or timeliness of the transactions processed is not correct. We could incur significant legal expense to defend 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 an error would be entirely reimbursed through insurance coverage. WE ARE SUBJECT TO RISK AS IT RELATES TO SOFTWARE THAT WE LICENSE FROM THIRD
PARTIES.
We believe we have controls and procedures in place to address our fiduciary responsibility and mitigate these risks. However, if we are not successful in managing these risks, our business, financial condition and results of operations may be harmed.
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.
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. In addition, we cannot be certain that the different insurance carriers which provide errors and omissions coverage for different lines of our business will not dispute their obligation to cover a particular claim. If we have a large claim, or a large number of claims, on our insurance, the rates for such insurance may increase, and amounts expended in defense or settlement of these claims prior to exhaustion of deductible or self-retention levels may become significant, but contractual arrangements with clients may constrain our ability to incorporate such increases into service fees. Such insuranceInsurance rate increases, disputes by carriers over coverage questions, payments by us within deductible or self-retention limits, as well as any underlying claim,claims or settlement of such claims, could have a material adverse effect on our business, financial condition and results of operations.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER OUR OPERATIONS.
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Our principal stockholders may have substantial control over our operations.
As of
March 24, 2003,December 31, 2005, the
following groupsstockholders identified below owned the following aggregate amounts and percentages of our common stock, including shares that may be acquired by exercising
options or warrants:
- approximately 14,788,098 shares, representing 15.5% of all our
outstanding common stock, were owned by Michael G. DeGroote;
- approximately 5,422,222 shares, representing 5.7% of all our outstanding
common stock, were owned by H. Wayne Huizenga, a principal stockholder;
and
11
- approximately 23,289,418 shares, representing 24.4% of all our
outstanding common stock, were owned by our executive officers,
directors, Mr. DeGroote and Mr. Huizenga, as a group.
options: | | |
| • | approximately 15.3 million shares, representing 20.7% of all our outstanding common stock, were owned by Michael G. DeGroote; |
|
| • | approximately 5.8 million shares, representing 7.9% of all our outstanding common stock, were owned by Cardinal Capital Management LLC; |
|
| • | approximately 5.1 million shares, representing 7.0% of all our outstanding common stock, were owned by Dimensional Fund Advisors Inc.; |
|
| • | approximately 29.2 million shares, representing 39.6% of all our outstanding common stock, were owned by our executive officers, directors, and the foregoing as a group. |
Because of their stock ownership, these persons can substantiallystockholders may exert substantial influence or actions that require the consent of a majority of our outstanding shares, including the election of directors. WE HAVE SHARES ELIGIBLE FOR FUTURE SALE THAT COULD ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK.
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 price of our 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 9574 million shares.shares at January 31, 2006. More than 47 million of these shares have been issued in connection with acquisitions. As part of many acquisition transactions, the shares wereare contractually restricted from sale for periods up to two years, mostand as of which
had expired by the end of 2001. As of March 24, 2003, 177,000January 31, 2006, approximately 242,000 shares of common stock were underlock-up contractual restrictions. We cannot be sure when sales by holders of our stock will occur, how many shares will be sold or the effect that sales may have on the market price of our common stock. As of March 24,
2003,January 31, 2006, we also have registered under the Securities Act the following shares of common stock for the following purposes:
- $125 million in shares of our common stock, debt securities, and warrants
to purchase common stock or debt securities, of which $100 million remain
available to be offered from time to time by us to the public under our
universal shelf registration statement;
-1933, 15 million shares of our common stock, allmost of which remain available to be offered from time to time 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.
statement.
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 possible loss of 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 completed a significant number of acquisitions from 1996 through 1999.
While we have made only one acquisitionmay not be able to acquire and finance additional businesses which may limit our ability to pursue our business strategy.
CBIZ acquired three businesses during 2005, and two in 2002, itJanuary 2006. 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 that 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,completed, will perform as expected or will contribute significant synergies, 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. Management believes that funds
availableThere are certain provisions under theour credit facility along with cash generated from operations,
will be sufficient to meet our liquidity needs in the foreseeable future;
however, there are certain restrictions under our bank line of credit that may prohibitlimit our ability to acquire additional businesses. In the event that we 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 required to pay down the outstanding balance on the line of credit. See note 8However, management believes that funds available under the credit facility, along with cash generated from operations, will be sufficient to CBIZ's consolidatedmeet our liquidity needs, including planned acquisition activity in the foreseeable future. To the extent we are unable to find suitable acquisition candidates, an important component of our growth strategy may not be realized.
12
The business services industry is competitive and fragmented. If we are unable to compete effectively, our business, financial statements included herewith.
12
THE OUTSOURCING INDUSTRY IS COMPETITIVE AND FRAGMENTED.
condition and results of operations may be harmed. We face competition from a number of sources in both the outsourced business services industry and from specialty insurance agencies. Competition in both industries has led to consolidationconsolidation. Many of manyour competitors are large companies that may have greater financial, technical, marketing and other resources than us. In addition to these new large companies and specialty insurance agencies, we face competition in the outsourced business services industry from in-house employee services departments, local outsourcingbusiness services companies and 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 industry 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 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 our business, financial condition and results of operations.
CBIZ makes available, free
Item 1B. Unresolved Staff Comments
None.
CBIZ’s corporate headquarters is located at 6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio 44131, in leased premises. Some of charge on its website, www.cbiz.com, through
the Investor Information pages, its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K,CBIZ’s property and amendmentsequipment are subject to all those
reports as soon as reasonably practicable after CBIZ files (or furnishes) such
reports to the U.S. Securities and Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
Since September 1999, seven purported stockholder class-action lawsuits
filed againstliens securing payment of indebtedness of CBIZ and certain of our currentits subsidiaries. CBIZ and former directors and officers
were consolidated as In Re Century Business Services Securities Litigation, Case
No. 1:99CV2200,its subsidiaries lease more than 140 offices in 34 states, the United States District Court for the Northern District of Ohio. The plaintiffs allegedColumbia and one in Toronto, Canada, as well as office equipment and company vehicles. Included in this total, and managed within the National Practices group, is the Company’s medical practice management business unit which has 74 offices. CBIZ believes 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 these lawsuits 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, its current facilities are sufficient for its current needs.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
| |
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of
CBIZ'sCBIZ’s stockholders during the fourth quarter of the fiscal year covered by this Annual Report.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The
| |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock
CBIZ’s common stock
of CBIZ is quoted on the Nasdaq National Market under the trading symbol
"CBIZ"“CBIZ”. The table below sets forth the range of high and low sales prices for
the Common StockCBIZ’s common stock as reported on the Nasdaq National Market for the periods indicated.
PRICE RANGE OF
COMMON STOCK
--------------
HIGH LOW
----- -----
2001
First Quarter............................................. $2.63 $1.16
Second Quarter............................................ 5.50 1.59
Third Quarter............................................. 4.78 2.02
Fourth Quarter............................................ 2.75 1.50
2002
First Quarter............................................. 3.56 2.05
Second Quarter............................................ 4.07 2.81
Third Quarter............................................. 3.21 1.91
Fourth Quarter............................................ 3.50 2.20
| | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| | | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | | |
| First quarter | | $ | 4.60 | | | $ | 3.89 | | | $ | 5.15 | | | $ | 3.34 | |
| Second quarter | | $ | 4.22 | | | $ | 3.30 | | | $ | 5.12 | | | $ | 4.00 | |
| Third quarter | | $ | 5.10 | | | $ | 3.92 | | | $ | 4.95 | | | $ | 3.85 | |
| Fourth quarter | | $ | 6.90 | | | $ | 4.77 | | | $ | 4.74 | | | $ | 4.06 | |
On December 31, 2002,30, 2005, the last reported sale price of CBIZ'sCBIZ’s Common Stock as reported on the Nasdaq National Market (Nasdaq Amex-Online) was $2.65$6.02 per share. As of February 21, 2003,28, 2006, CBIZ had 8,844approximately 7,750 holders of record of its common stock, and the last sale of CBIZ'sCBIZ’s common stock as of that date was $2.75.
DIVIDEND POLICY
$7.26.
13
Dividend Policy
CBIZ has not paid cash dividends on its common stock since April 27, 1995, and does not anticipate paying cash dividends in the foreseeable future. CBIZ'sCBIZ’s Board of Directors decides onhas discretion over the payment and level of dividends on common stock. The Board of Directors'Directors’ decision is based among other things, on results of operations and financial condition. In addition, CBIZ'sCBIZ’s credit facility contains a requirement for lender consent priordoes not permit CBIZ to declare or make any dividend payments, other than dividend payments made by one of CBIZ’s wholly owned subsidiaries to the declaration of any
dividends.parent company. 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 and will depend on a number of factors, including future earnings, 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 may deem relevant.
Issuer Purchases of Equity Securities
(c) On February 10, 2005, CBIZ’s Board of Directors authorized the share repurchase of up to 5.0 million shares of CBIZ common stock; this plan expired December 31, 2005. On February 9, 2006, the Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ common stock through March 31, 2007. Stock repurchase activity during the year ended December 31, 2005 is summarized in the table below (in thousands, except per share data).
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Maximum | |
| | | | | | | Total Number | | | Number of | |
| | | Total | | | | | of Shares | | | Shares That | |
| | | Number of | | | Average | | | Purchased as | | | May Yet Be | |
| | | Shares | | | Price Paid | | | Part of Publicly | | | Purchased | |
| Period | | Purchased(1) | | | Per Share(2) | | | Announced Plan | | | Under the Plan | |
| | | | | | | | | | | | | |
| Total first quarter purchases | | | 90 | | | $ | 4.12 | | | | 90 | | | | 4,910 | |
| Total second quarter purchases | | | 1,786 | | | $ | 4.03 | | | | 1,786 | | | | 3,124 | |
| Total third quarter purchases(3) | | | 1,344 | | | $ | 4.58 | | | | 1,344 | | | | 1,780 | |
Fourth Quarter Purchases by Month | | | | | | | | | | | | | | | | |
| | October 1 – October 31, 2005(3) | | | 583 | | | $ | 5.03 | | | | 583 | | | | 1,197 | |
| | November 1 – November 30, 2005 | | | — | | | | — | | | | — | | | | 1,197 | |
| | December 1 – December 31, 2005 | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | Total fourth quarter purchases | | | 583 | | | $ | 5.03 | | | | 583 | | | | | |
| | | | | | | | | | | | | |
| Total purchases during the year ended December 31, 2005 | | | 3,803 | | | $ | 4.38 | | | | 3,803 | | | | | |
| | | | | | | | | | | | | |
| |
| (1) | Open market purchases. |
|
| (2) | Average price paid per share includes fees and commissions. |
|
| (3) | CBIZ utilized, and may utilize in the future, a Rule 10b5-1 trading plan to allow for repurchases by the Company during periods when it would not normally be active in the trading market due to regulatory restrictions. Under the Rule 10b5-1 trading plan, CBIZ was unable to repurchase shares above a pre-determined price per share. Additionally, the maximum number of shares that may be purchased by the Company each day is governed by Rule 10b-18. |
14
ITEM 6. SELECTED FINANCIAL DATA
| |
| Item 6. | Selected Financial Data |
The following table presents selected historical financial data for CBIZ and is derived from the historical consolidated financial statements and notes thereto, which are included elsewhere in this Annual Report of CBIZ.thereto. The information set forth below should be read in conjunction with "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations" andOperations”, the consolidated financial statements of CBIZ and the notes thereto, which are included elsewhere in this Annual Report.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2005 | | | 2004(1) | | | 2003(1) | | | 2002(1) | | | 2001(1) | |
| | | | | | | | | | | | | | | | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 559,269 | | | $ | 504,898 | | | $ | 482,254 | | | $ | 472,170 | | | $ | 488,573 | |
| Operating expenses | | | 485,295 | | | | 438,417 | | | | 419,932 | | | | 417,424 | | | | 417,980 | |
| | | | | | | | | | | | | | | | |
| Gross margin | | | 73,974 | | | | 66,481 | | | | 62,322 | | | | 54,746 | | | | 70,593 | |
| Corporate general and administrative expense | | | 24,911 | | | | 24,099 | | | | 18,745 | | | | 17,673 | | | | 18,741 | |
| Depreciation and amortization expense | | | 15,163 | | | | 16,010 | | | | 16,581 | | | | 19,881 | | | | 39,909 | |
| | | | | | | | | | | | | | | | |
| Operating income | | | 33,900 | | | | 26,372 | | | | 26,996 | | | | 17,192 | | | | 11,943 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| | Interest expense | | | (3,109 | ) | | | (1,507 | ) | | | (1,055 | ) | | | (2,477 | ) | | | (6,795 | ) |
| | Gain (loss) on sale of operations, net | | | 314 | | | | 996 | | | | 2,519 | | | | 930 | | | | (7,113 | ) |
| | Other income (expense), net | | | 5,052 | | | | 3,532 | | | | (1,227 | ) | | | (1,561 | ) | | | 4,393 | |
| | | | | | | | | | | | | | | | |
| | | Total other income (expense) | | | 2,257 | | | | 3,021 | | | | 237 | | | | (3,108 | ) | | | (9,515 | ) |
| Income from continuing operations before income tax expense | | | 36,157 | | | | 29,393 | | | | 27,233 | | | | 14,084 | | | | 2,428 | |
| Income tax expense | | | 14,571 | | | | 8,045 | | | | 11,918 | | | | 7,476 | | | | 13,446 | |
| | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | 21,586 | | | | 21,348 | | | | 15,315 | | | | 6,608 | | | | (11,018 | ) |
| Loss from operations of discontinued operations, net of tax | | | (6,463 | ) | | | (5,429 | ) | | | (725 | ) | | | (978 | ) | | | (4,982 | ) |
| Gain (loss) on disposal of discontinued operations, net of tax | | | 3,550 | | | | 132 | | | | 726 | | | | (2,471 | ) | | | — | |
| Cumulative effect of change in accounting principle, net of tax(2) | | | — | | | | — | | | | — | | | | (80,007 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 18,673 | | | $ | 16,051 | | | $ | 15,316 | | | $ | (76,848 | ) | | $ | (16,000 | ) |
| | | | | | | | | | | | | | | | |
| Basic weighted average common shares | | | 74,448 | | | | 79,217 | | | | 90,400 | | | | 94,810 | | | | 94,818 | |
| Diluted weighted average common shares | | | 76,827 | | | | 81,477 | | | | 92,762 | | | | 96,992 | | | | 94,818 | |
| Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.29 | | | $ | 0.27 | | | $ | 0.17 | | | $ | 0.07 | | | $ | (0.12 | ) |
| | Discontinued operations | | | (0.04 | ) | | | (0.07 | ) | | | — | | | | (0.04 | ) | | | (0.05 | ) |
| | Cumulative effect of accounting change | | | — | | | | — | | | | — | | | | (0.84 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| | Net income (loss) | | $ | 0.25 | | | $ | 0.20 | | | $ | 0.17 | | | $ | (0.81 | ) | | $ | (0.17 | ) |
| | | | | | | | | | | | | | | | |
| Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.28 | | | $ | 0.26 | | | $ | 0.17 | | | $ | 0.07 | | | $ | (0.12 | ) |
| | Discontinued operations | | | (0.04 | ) | | | (0.06 | ) | | | — | | | | (0.04 | ) | | | (0.05 | ) |
| | Cumulative effect of accounting change | | | — | | | | — | | | | — | | | | (0.82 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| | Net income (loss) | | $ | 0.24 | | | $ | 0.20 | | | $ | 0.17 | | | $ | (0.79 | ) | | $ | (0.17 | ) |
| | | | | | | | | | | | | | | | |
| OTHER DATA: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 454,578 | | | $ | 414,115 | | | $ | 402,145 | | | $ | 433,111 | | | $ | 528,349 | |
| Long-term debt | | $ | 33,425 | | | $ | 55,398 | | | $ | 14,985 | | | $ | 18,084 | | | $ | 55,888 | |
| Total liabilities | | $ | 199,917 | | | $ | 167,618 | | | $ | 124,307 | | | $ | 138,793 | | | $ | 157,702 | |
| Total stockholders’ equity | | $ | 254,661 | | | $ | 246,497 | | | $ | 277,838 | | | $ | 294,318 | | | $ | 370,647 | |
| PRO FORMA NET INCOME(3): | | | | | | | | | | | | | | | | | | | | |
| Net income from continuing operations | | | | | | | | | | | | | | | | | | $ | 9,531 | |
| Basic earnings per share | | | | | | | | | | | | | | | | | | $ | 0.10 | |
| Diluted earnings per share | | | | | | | | | | | | | | | | | | $ | 0.10 | |
YEAR ENDED DECEMBER 31,
----------------------------------------------------- | |
| (1) | Certain amounts have been reclassified to conform to the current year presentation. |
|
| (2) | Effective January 1, 2002, 2001 2000 1999 1998
-------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $504,335 $516,892 $ 551,171 $529,639 $346,143
Operating expenses................................ 445,666 447,513 490,581 440,381 275,895
-------- -------- --------- -------- --------
Gross margin...................................... 58,669 69,379 60,590 89,258 70,248
Expenses:
Corporate generalCBIZ adopted Statement of Financial Accounting Standard No., 142 “Goodwill and administrative............ 19,672 19,797 24,694 19,138 5,155
DepreciationOther Intangible Assets” (SFAS 142), which requires that goodwill and amortization................... 20,657 40,636 43,339 22,192 10,423
Merger-related.................................. -- -- -- 5,789 4,535
-------- -------- --------- -------- --------
Operating income (loss)........................... 18,340 8,946 (7,443) 42,139 50,135
Other income (expense):
Interest expense................................ (2,478) (6,797) (12,113) (6,552) (3,240)
Goodwill impairment............................. -- -- (32,953) -- --
Gain (loss)intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually at the reporting unit level. CBIZ finalized the required transitional tests of goodwill during 2002, and recorded an impairment charge of $88.6 million on salea pre-tax basis. This non-cash charge is reflected as a cumulative effect of operations, net.......... 930 (7,113) (31,576) (7,067) 1,450
Other income (expense), net..................... (1,112) 3,939 (5,834) (4,626) 3,253
-------- -------- --------- -------- --------
Total other income (expense)................ (2,660) (9,971) (82,476) (18,245) 1,463
Income (loss) from continuing operations before
income tax expense.............................. 15,680 (1,025) (89,919) 23,894 51,598
Income tax expense................................ 8,124 12,192 1,514 13,543 18,189
-------- -------- --------- -------- --------
Income (loss) from continuing operations.......... 7,556 (13,217) (91,433) 10,351 33,409
Income (loss) from operations of discontinued
businesses, net of tax.......................... (1,926) (2,783) (17,041) (2,517) 10,481
Loss on disposal of discontinued businesses, net
of tax.......................................... (2,471) -- (5,697) (391) --
Cumulative effect ofa change in accounting principle in the amount of $80.0 million, net of tax........................... (80,007) -- (11,905) -- --
-------- -------- --------- -------- --------
Neta tax benefit of $8.6 million. |
| |
| (3) | Pro forma net income (loss)................................. $(76,848) $(16,000) $(126,076) $ 7,443 $ 43,890
======== ======== ========= ======== ========
Basic Shares...................................... 94,810 94,818 94,674 86,851 67,880
Diluted shares.................................... 96,992 94,818 94,674 91,702 81,084
Diluted earnings (loss) per share:
Fromrepresents income from continuing operations...................... $ 0.08 $ (0.14) $ (0.96) $ 0.11 $ 0.41
From discontinued operations.................... $ (0.05) $ (0.03) $ (0.24) $ (0.03) $ 0.13
From cumulativeoperations assuming that the change in accounting principle for SFAS No. 142, adopted January 1, 2002, was applied retroactively (net of taxes) to the year ended December 31, 2001. In addition, pro forma diluted weighted average common shares for 2001 are 96,442, as the effect of accounting change..... $ (0.82) $ -- $ (0.13) $ -- $ --
-------- -------- --------- -------- --------
From net income (loss).......................... $ (0.79) $ (0.17) $ (1.33) $ 0.08 $ 0.54
======== ======== ========= ======== ========
OTHER DATA:
Total assets...................................... $433,111 $528,349 $ 649,494 $809,085 $579,764
Total liabilities................................. $138,793 $157,702 $ 262,556 $295,953 $175,403
Total stockholders' equity........................ $294,318 $370,647 $ 386,938 $513,132 $404,361
PRO FORMA NET INCOME(1):
Net income (loss)................................. $ 7,556 $ 7,332 $ (65,584) $ 16,661 $ 35,691
Basic earnings (loss) per share................... $ 0.08 $ 0.08 $ (0.69) $ 0.19 $ 0.53
Diluted earnings (loss) per share................. $ 0.08 $ 0.08 $ (0.69) $ 0.18 $ 0.44
the incremental shares are not anti-dilutive on a pro forma basis. |
- ---------------
(1) Pro forma net income (loss) represents income from continuing operations
assuming the change in accounting principles for Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 101, adopted January 1, 2000,
and Financial Accounting Standards Board (FASB) No. 142, adopted January 1,
2002, were applied retroactively, net of taxes, for all periods presented.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
| |
| 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 CBIZ'sCBIZ’s financial position at December 31, 2005 and 2004, and results of operations and cash flows for each of the years ended December 31, 2002, 20012005, 2004 and 2000.2003. This discussion should be read in conjunction with CBIZ'sCBIZ’s consolidated financial statements and related notes thereto included elsewhere in this Annual Report.
RECENT DEVELOPMENTS
During 2002, Report on Form 10-K. This discussion and analysis contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Uncertainty of Forward-Looking Statements” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K.
Overview
CBIZ rationalized and sharpened the focus ofseeks to strengthen its operations and customer service capabilities by selling, closing or committing to sale, the divestiture of sixteen businesses.
Five of these operations have been 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." Eleven of
these operations did not meet the criteria for treatment as discontinued
operations and have been accounted for as gain (loss) on divested operations
from continuing operations in the accompanying statements of operations. CBIZ
will continue to divest those non-strategicselectively acquiring businesses that are either
under-performing,complementary in building out our service offerings in our target markets. During the year ended December 31, 2005, CBIZ acquired three businesses consisting of a registered investment advisory firm in Cleveland, Ohio, an accounting and consulting practice in San Diego, California, and a valuation firm in Milwaukee, Wisconsin. In addition, CBIZ acquired two client lists which complement our Accounting, Tax and Advisory and Benefits and Insurance practices. CBIZ expects to continue its acquisition strategy, and in accordance with such acquired The TriMed Group and Valley Global Insurance Brokers in January 2006. The TriMed Group is located in Flint, Michigan and provides medical billing services and in-house computer systems primarily to hospital-based physician practices; Valley Global Insurance Brokers is a property and casualty insurance broker located in San Jose, California.
As part of its strategy to promote and strengthen cross-serving, CBIZ consolidates operations and locations in fragmented markets. During the year ended December 31, 2005, CBIZ consolidated offices in the Denver market, and continued consolidation activities in the Chicago market.
CBIZ continually evaluates its business operations, and may from time to time sell or close operations that are underperforming, located in secondary markets, or that do not provide the level of synergistic cross-serving opportunities with other CBIZ businesses that is desired. AlthoughDuring 2005, CBIZ sold a business operation from the Benefits and Insurance practice group, closed a business operation from the Accounting, Tax and Advisory practice group, and committed to the divesture of a business unit in the National Practices — Other practice group. These divestitures are consistent with CBIZ’s plan to focus on metropolitan markets in which we cannot predictcan strengthen our core service offerings.
CBIZ believes that repurchasing shares of its common stock is a use of cash that provides value to stockholders, and accordingly the proceeds for certain units orBoard of Directors approved a plan allowing CBIZ to repurchase up to 5.0 million shares of its common stock during 2005. During the resulting gain or loss, additional gains/lossesyear ended December 31, 2005, CBIZ repurchased approximately 3.8 million shares of CBIZ common stock at a total cost of $16.7 million. The credit facility and net cash provided by CBIZ operations were utilized to fund share repurchases. On February 9, 2006, the Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ common stock through March 31, 2007. The shares may be incurred as future
transactions are completed.
In conjunction with the focus to rationalize the business, CBIZ is also
focused on acquiring businesses that will complement its service offerings in
those primary markets where CBIZ already has a significant presence. During the
fourth quarter of 2002, CBIZ acquired a benefits and insurance company to
strengthen our presencerepurchased in the Maryland area.
OPERATING PRACTICE GROUPSopen market or through privately negotiated purchases.
Effective February 13, 2006, CBIZ currently delivers productsentered into a new $100 million unsecured credit facility, with an option to increase the commitment to $150 million. The new facility provides CBIZ with lower borrowing costs and servicesgreater flexibility with regards to corporate initiatives such as acquisitions and share repurchases.
Effective August 1, 2005, pursuant to approval by our Board of Directors and shareholders, CBIZ changed its corporate name from “Century Business Services, Inc.” to “CBIZ, Inc.” CBIZ believes that this name change is integral to promoting greater name recognition in the marketplace, and to reinforcing our image as a unified provider of business services.
Results of Operations — Continuing Operations
CBIZ provides solutions that enable our clients to better manage their finances, employees and technology, through three practice groups. Below is aA brief description of these groups'groups’ operating results and factors affecting their businesses.businesses is provided below. The services offeredMedical Management Professionals unit (CBIZ MMP), which reports under eachthe National Practices group, exceeds the quantitative threshold of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” for aggregation and therefore is reported as a separate segment.
Same-unit revenue represents total revenue adjusted to reflect comparable periods of activity for acquisitions and divestitures. For example, for an operation divested on July 1, 2005, revenue from the periods July 1 through
16
December 31, 2004 are reported as revenue from divested operations; thus, same-unit revenue includes revenue for the periods January 1 through June 30 of both years. Revenue from divested operations represents operations that did not meet the criteria for treatment as discontinued operations.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenue
The following table summarizes total revenue for the twelve months ended December 31, 2005 and 2004 (in thousands, except percentages)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | | | % of | | | | | % of | | | $ | | | % | |
| | | 2005 | | | Total | | | 2004 | | | Total | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | | | |
Same-unit revenue | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounting, Tax and Advisory | | $ | 227,878 | | | | 40.7% | | | $ | 211,378 | | | | 41.9% | | | $ | 16,500 | | | | 7.8% | |
| Benefits and Insurance | | | 142,343 | | | | 25.5% | | | | 141,258 | | | | 28.0% | | | | 1,085 | | | | 0.8% | |
| |
| CBIZ MMP | | | 97,583 | | | | 17.5% | | | | 87,261 | | | | 17.3% | | | | 10,322 | | | | 11.8% | |
| National Practices — Other | | | 67,733 | | | | 12.1% | | | | 64,369 | | | | 12.7% | | | | 3,364 | | | | 5.2% | |
| | | | | | | | | | | | | | | | | | | |
| | Total National Practices | | | 165,316 | | | | 29.6% | | | | 151,630 | | | | 30.0% | | | | 13,686 | | | | 9.0% | |
| | | | | | | | | | | | | | | | | | | |
| | | Total same-unit revenue | | | 535,537 | | | | 95.8% | | | | 504,266 | | | | 99.9% | | | | 31,271 | | | | 6.2% | |
| Acquired businesses | | | 23,732 | | | | 4.2% | | | | — | | | | | | | | 23,732 | | | | | |
| Divested operations | | | — | | | | | | | | 632 | | | | 0.1% | | | | (632 | ) | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Total revenue | | $ | 559,269 | | | | | | | $ | 504,898 | | | | | | | $ | 54,371 | | | | 10.8% | |
| | | | | | | | | | | | | | | | | | | |
Same-unit revenue growth was 6.2% for the twelve months ended December 31, 2005 from the comparable period in 2004. A detailed discussion of revenue by practice group is included under “Operating Practice Groups” below.
Expenses
Operating expenses increased to $485.3 million for the twelve months ended December 31, 2005, from $438.4 million for the comparable period in 2004, an increase of $46.9 million or 10.7%. As a percent of revenue, operating expenses (excluding consolidation and integration charges) were 86.1% and 86.3% for the twelve months ended December 31, 2005 and 2004, respectively. The primary components of operating expenses are personnel costs and occupancy expense, representing 80.0% and 80.3% of total operating expenses and 69.5% and 69.7% of revenue for the twelve months ended December 31, 2005 and 2004, respectively. As the majority of CBIZ’s operating costs are relatively fixed in the short term, gross margin as a percentage of revenue generally improves with revenue growth. However, for the twelve months ended December 31, 2005 versus the comparable period in 2004, gross margin as a percentage of revenue did not change primarily as the result of consolidation and integration charges incurred during 2005 (described in further detail below), and expenses related to our incentive compensation plan. A more comprehensive analysis of operating expenses and their impact on gross margin is discussed by operating practice group below.
Consolidation and integration charges are reported as operating expenses in the accompanying consolidated statements of operations, and were 0.7% and 0.5% of revenue for the twelve months ended December 31, 2005 and 2004, respectively. The increase in consolidation and integration charges in 2005 versus 2004 was primarily due to co-location activities in the Denver and Chicago markets during 2005.
Corporate general and administrative expenses increased to $24.9 million from $24.1 million, but decreased as a percentage of revenue to 4.4% from 4.8% for the twelve months ended December 31, 2005 and 2004, respectively. The increase in corporate general and administrative expenses was primarily attributable to compensation and benefits, including expenses related to our incentive compensation plan. The incentive compensation plan is further discussed under “Critical Accounting Policies — Incentive Compensation” below.
Depreciation and amortization expense was $15.2 million or 2.7% of revenue for the twelve months ended December 31, 2005, compared to $16.0 million or 3.2% of revenue for the comparable period in 2004. The decrease in depreciation and amortization expense was primarily attributable to the shift from purchasing computer-related equipment and furniture to leasing such items. Operating lease costs are recorded as operating
17
expenses rather than capitalized and recorded as depreciation expense. Lease expenses related to these groups are describeditems totaled $3.5 million and $2.5 million for the twelve months ended December 31, 2005 and 2004, respectively.
Other Income and Expense
Interest expense increased by $1.6 million to $3.1 million for the twelve months ended December 31, 2005, from $1.5 million for the comparable period in Part I2004. The increase in interest expense was the result of this report.higher average debt and higher interest rates during the twelve months ended December 31, 2005 versus the comparable period in 2004. Average debt was $51.6 million for the twelve months ended December 31, 2005 compared to $40.9 million for the comparable period in 2004, and average interest rates were 5.4% and 3.5% for the twelve months ended December 31, 2005 and 2004, respectively. Higher debt during 2005 compared to 2004 was primarily due to $29.3 million in spending during 2005 for share repurchases and acquisitions. Debt is further discussed under “Liquidity and Capital Resources”.
Gain on sale of operations, net was $0.3 million for the twelve months ended December 31, 2005, and was related to the sale of client lists from the Accounting, Tax and Advisory Services. The ATA group contributed
approximately $209.9 million and $231.4 million of revenue, or approximately 42%Benefits and 45% of CBIZ's annual revenue in 2002 and 2001, respectively. The decrease in
revenue attributable to divestitures completed duringInsurance practice groups. For the yeartwelve months ended December 31, 2002 was $11.0 million. For ATA businesses with a full period2004, gain on sale of operations, net was $1.0 million and was related to the sale of two operations and three client lists in the Accounting, Tax and Advisory practice group, and a client list from the Benefits and Insurance practice group.
Other income, net was $5.1 million for the yeartwelve months ended December 31, 2002,2005, and $3.5 million for the comparable period in 2004. Other income (expense), net is comprised primarily of interest income earned on funds held for clients at CBIZ’s payroll business, income earned on assets held in a rabbi trust related to the deferred compensation plan, gains and losses on sales of assets, and miscellaneous income such as contingent royalties from previous divestitures. The increase in other income for the twelve months ended December 31, 2005 from the comparable period in 2004, was primarily the result of higher interest earned on restricted cash and funds held for clients primarily at CBIZ’s payroll business, higher contingent royalties earned from previous divestitures, and income earned on assets of the deferred compensation plan. The increase in other income was partially offset by $0.4 million in interest income in 2004 related to a tax refund, that did not recur in 2005.
Income Taxes
CBIZ recorded income tax expense from continuing operations of $14.6 million and $8.0 million for the years ended December 31, 2005 and 2004, respectively. The effective tax rate for the twelve months ended December 31, 2005 was 40.3%, which is generally in line with statutory federal and state tax rates of approximately 40.0%. The effective tax rate for the twelve months ended December 31, 2004 was 27.4%, and reflected a $3.5 million tax benefit related to a favorable tax position which was successfully resolved upon completion of an examination by the Internal Revenue Service for the years ended December 31, 1998, 1999 and 2000.
Operating Practice Groups
Accounting, Tax and Advisory Services.
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2005 | | | 2004 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 227,878 | | | $ | 211,378 | | | $ | 16,500 | |
| | Acquired businesses | | | 17,671 | | | | — | | | | 17,671 | |
| | Divested operations | | | — | | | | 632 | | | | (632 | ) |
| | | | | | | | | | |
| | | Total revenue | | | 245,549 | | | | 212,010 | | | | 33,539 | |
| Operating expenses | | | 208,316 | | | | 182,564 | | | | 25,752 | |
| | | | | | | | | | |
| Gross margin | | $ | 37,233 | | | $ | 29,446 | | | $ | 7,787 | |
| | | | | | | | | | |
| Gross margin percent | | | 15.2 | % | | | 13.9 | % | | | 1.3 | % |
Same-unit revenue decreased $10.5for the twelve months ended December 31, 2005 increased by $16.5 million or 4.5%.
This decrease7.8% from the twelve months ended December 31, 2004. The growth in same-unit revenue was primarily drivendue to an increase in fees earned pursuant to administrative service agreements (further described under “Business Services” of Item 1), an increase in the aggregate number of hours charged to clients for consulting, litigation support and
18
Sarbanes-Oxley consulting and compliance services, net price increases for traditional accounting and tax services and litigation support, and a higher number of transactions closed by the decreaseour real estate brokerage firm during 2005 versus 2004. The growth in revenue from acquired businesses was provided by accounting and consulting firms in San Diego, California and Denver, Colorado. Divested operations represent one small unit that did not provide opportunity for growth or cross-serving capabilities.
The largest components of operating expenses for the demandAccounting, Tax and Advisory practice group are personnel costs, occupancy costs and professional service fees paid to third parties, representing 88.0% and 88.1% of total operating expenses for the twelve months ended December 31, 2005 and 2004, respectively. Personnel costs increased $19.7 million in discretionary work, such2005 from 2004, primarily due to additional professionals employed by CBIZ, both from acquired businesses and to accommodate growth in revenue. As a percentage or revenue, personnel costs decreased to 65.5% for the twelve months ended December 31, 2005, from 66.6% for the comparable period in 2004, primarily as consulting projects and special work
relatedthe result of improved utilization of personnel. Occupancy costs are relatively fixed in nature but increased $0.8 million for the twelve months ended December 31, 2005 from the comparable period in 2004, primarily due to the business transactions relatedacquired in San Diego, California. As a percentage of revenue, occupancy costs decreased to mergers and acquisitions, and a weak
economy. These decreases6.4% for the twelve months ended December 31, 2005 from 7.0% for the comparable period in 2004, primarily due to the increase in revenue causedpreviously discussed. Professional service fees paid to third parties increased $2.0 million to 2.8% of revenue from 2.3% of revenue for the twelve months ended December 31, 2005 and 2004, respectively. Professional service fees paid to third parties are primarily the result of our utilization of third-party professionals to provide Sarbanes-Oxley consulting and compliance services to our clients.
Gross margin as a decreasepercent of revenue increased by 1.3% for the twelve months ended December 31, 2005 from the comparable period in gross margin from 14.7%2004, primarily due to the improved utilization of personnel combined with an increase in 2001net rates charged to 13.3%clients for accounting and tax services and an increase in 2002. the number of hours charged to clients for consulting, litigation support and Sarbanes-Oxley consulting and compliance services.
CBIZ expects its ATA Services group to achieve modest
revenue growth for the ATA practice to continue in 2006, which is consistent with trends in the accounting industry. The accounting industry is experiencing growth in revenue from both an increase in services being provided to clients and an increase in the rates being charged to clients. The accounting industry also continues to experience pricing pressures on compensation as well as improvementfirms compete for qualified professionals to support the growth in revenue. As a result of these pricing pressures, CBIZ expects the growth in revenue to be accompanied by modest improvements in gross margin in 2003. Improvements in
staff utilization, both internally and through the arrangement with HarborView,
are expected to contribute to margin improvement. Under the terms of the
agreement between the two companies, CBIZ is the exclusive provider of
professional staff to HarborView Partners to conduct internal audits for
engagements that HarborView Partners secures within the United States.
2006.
Benefits and Insurance Services. The Benefits and Insurance group
contributed approximately $150.5 million and $141.3 million of
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2005 | | | 2004 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 142,343 | | | $ | 141,258 | | | $ | 1,085 | |
| | Acquired businesses | | | 3,873 | | | | — | | | | 3,873 | |
| | Divested operations | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| | | Total revenue | | | 146,216 | | | | 141,258 | | | | 4,958 | |
| Operating expenses | | | 116,149 | | | | 112,987 | | | | 3,162 | |
| | | | | | | | | | |
| Gross margin | | $ | 30,067 | | | $ | 28,271 | | | $ | 1,796 | |
| | | | | | | | | | |
| Gross margin percent | | | 20.6 | % | | | 20.0% | | | | 0.6 | % |
Same-unit revenue
or
approximately 30% and 27% of CBIZ's annual revenue in 2002 and 2001,
respectively. The increase in revenue is attributable to organic growth, offset
byfor the
decrease in revenue related to divestitures completed during the yeartwelve months ended December 31,
2001 of $5.0 million. For Benefits and Insurance businesses
with a full period of operations for2005 increased by $1.1 million or 0.8% from the
yeartwelve months ended December 31,
2002, same-unit
revenue increased $14.2 million, or 10.0%.2004. The
gross margin decreased slightly
from 20.6% in 2001 to 18.0% in 2002. CBIZ's Benefits and Insurance group had
benefited in the last year from a firming of premium prices, particularly for
the group health and property and casualty products. In addition, the worksite
marketing division increased revenue and improved their profitability
significantly, due to several large cases closed in 2002. However, reductions in
equity values have caused revenue to decline on asset-based fees, particularly
in the pension and retirement areas.
16
Due to a number of factors, including the increasing costs of health care and an
aging population, CBIZ expects premium pricing to remain stable.
National Practices Services. The National Practices group contributed
approximately $143.9 million and $144.2 million of revenue, or approximately 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. CBIZ MMP's revenue growth of 16.4% is
attributable to the addition of new clients, growth of existing clients and
expansion into new markets, such as entrance into the western region of the
United States during 2002. Revenue for CBIZ MMP is based on a percentage of
patient accounts collected on behalf of their clients. The gross margin
decreased slightly from 19.4% in 2001 to 17.6% in 2002 due in part to medicare
reimbursement costs and investment costs related to the expansion into new
regions. CBIZ expects growth in revenue of CBIZ MMP to continue, although we
cannot assure that the growth will continue at the levels we have seen in the
past year.
The other units within National Practices, excluding CBIZ MMP, contributed
approximately $77.8 million and $87.4 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 1.7%. The decrease in same-unit revenue was relatedprimarily attributable to several areas, including the information
technology (IT) area, valuationgrowth in our group health and property tax services, and government
relations. This washuman capital advisory businesses. These increases were partially offset by improvementthe loss of a large client from our retail business, the pricing of property and casualty policies sold during 2005 versus 2004, and a decline 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 4.1% in 2001 to 1.5% in 2002, primarily driven by
valuation adjustments to inventory in the IT group. While CBIZ targets large
transactions of this naturerevenue 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. CBIZ does expect modestbank-owned life insurance business. The growth in revenue from acquired businesses was provided by a group benefits business in Owings Mills, Maryland and a registered investment advisory firm in Cleveland, Ohio. The largest components of operating expenses for the other National Practices, as well as margin
improvement.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBERBenefits and Insurance practice group are personnel costs, commissions paid to third party brokers, and occupancy costs, representing 86.5% and 86.3% of total operating expenses for the twelve months ended December 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Revenues
Total2005 and 2004, respectively. Personnel costs increased $5.1 million to 57.0% of revenue for the year ended December 31, 20022005 from 55.4% of revenue for the
19
comparable period in 2004. Acquired businesses contributed $2.1 million of the increase in personnel costs; the remainder of the increase was $504.3primarily the result of investments in sales and support personnel intended to promote organic growth. Commissions paid to third party brokers decreased as a percentage of revenue to 6.1% for the twelve months ended December 31, 2005 from 7.8% for the twelve months ended December 31, 2004, primarily due to a decline in revenue at a national business unit that specializes in bank-owned life insurance. Such revenue loss resulted in a decline in commissions paid to external brokers. Occupancy costs are relatively fixed in nature and decreased as a percentage of revenue to 5.7% for the year ended December 31, 2005 from 5.8% for the comparable period in 2004, primarily as a result of overall growth in revenue.
Gross margin as a percent of revenue increased by 0.6% for the year ended December 31, 2005 from the comparable period in 2004, primarily due to the growth in revenue combined with expense management efforts. In 2006, CBIZ expects growth to continue in the Benefits and Insurance group based on our intention to continue making investments in sales and support personnel in select markets, to continue providing superior consulting and brokerage services for our commercial clients, to continue seeking cross-serving opportunities within CBIZ to garner new business and grow market share and to strengthen existing client relationships in order to promote retention.
CBIZ Medical Management Professionals (CBIZ MMP).
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2005 | | | 2004 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 97,583 | | | $ | 87,261 | | | $ | 10,322 | |
| | Acquired businesses | | | — | | | | — | | | | — | |
| | Divested operations | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| | | Total revenue | | | 97,583 | | | | 87,261 | | | | 10,322 | |
| Operating expenses | | | 80,033 | | | | 71,885 | | | | 8,148 | |
| | | | | | | | | | |
| Gross margin | | $ | 17,550 | | | $ | 15,376 | | | $ | 2,174 | |
| | | | | | | | | | |
| Gross margin percent | | | 18.0 | % | | | 17.6% | | | | 0.4 | % |
CBIZ MMP revenue increased by $10.3 million, or 11.8%, for the twelve months ended December 31, 2005 from the comparable period 2004. Growth was attributable to new clients obtained in 2005, the maturation of clients obtained in 2004, and growth in revenue from existing clients.
The largest components of operating expenses for CBIZ MMP are personnel costs, occupancy costs and office expenses (primarily postage), representing 88.1% and 88.9% of total operating expenses for the twelve months ended December 31, 2005 and 2004, respectively. Personnel costs increased by $5.1 million, but decreased as a percent of revenue to 58.0% from 58.9% for the twelve months ended December 31, 2005 and 2004, respectively. The increase in personnel costs was directly related to an increase in the number of client service staff employed by CBIZ MMP during 2005 compared to 2004, as required to support the growth in revenue. Additionally, CBIZ MMP added personnel in the compliance and technology disciplines to support the current infrastructure and to position the unit for continued growth in the future. Occupancy costs increased $1.0 million to 7.0% of revenue for the twelve months ended December 31, 2005 from 6.7% of revenue for the comparable period in 2004. The increase in occupancy costs was primarily due to additional space required and expenses incurred to accommodate overall growth of the unit. Office expenses for the twelve months ended December 31, 2005 increased 6.0% from the comparable period in 2004 in response to overall growth of the unit.
Gross margin as a percentage of revenue increased 0.4% for the twelve months ended December 31, 2005 from the comparable period in 2004 as a result of the growth in revenue. CBIZ expects MMP’S operating expenses to increase in 2006 based on significant investments to upgrade their operating system to allow for future growth. As a result of these investments, gross margin in 2006 is expected to remain consistent with 2005; however, gross margin as a percentage of revenue is expected to decline.
20
National Practice Services — Other
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2005 | | | 2004 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 67,733 | | | $ | 64,369 | | | $ | 3,364 | |
| | Acquired businesses | | | 2,188 | | | | — | | | �� | 2,188 | |
| | Divested operations | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| | | Total revenue | | | 69,921 | | | | 64,369 | | | | 5,552 | |
| Operating expenses | | | 60,969 | | | | 57,208 | | | | 3,761 | |
| | | | | | | | | | |
| Gross margin | | $ | 8,952 | | | $ | 7,161 | | | $ | 1,791 | |
| | | | | | | | | | |
| Gross margin percent | | | 12.8 | % | | | 11.1 | % | | | 1.7 | % |
Same-unit revenue for the twelve months ended December 31, 2005 increased by $3.4 million or 5.2% from the twelve months ended December 31, 2004. The increase in same-unit revenue was primarily due to growth in our technology businesses of $3.5 million, offset by a decline in revenue generated by the mergers and acquisition business of $0.5 million. Growth in revenue experienced by our technology businesses was largely the result of sales to new clients, as well as higher product sales at one unit. The decline in revenue experienced by the mergers and acquisition business was attributable to the number and size of transactions that closed during 2005 versus 2004. The mergers and acquisition business closed two transactions in 2005 as compared to $516.9three transactions that closed during 2004. The growth in revenue from acquired businesses was provided by a technology firm in Cleveland, Ohio, and a valuation business in Milwaukee, Wisconsin.
The largest components of operating expenses for the National Practices Services — Other segment are personnel costs, direct costs and occupancy costs, representing 89.6% and 90.8% of total operating expenses for the twelve months ended December 31, 2005 and 2004, respectively. Personnel costs increased $1.4 million for the twelve months ended December 31, 2005 from the comparable period in 2004, of which $1.1 million was attributable to acquired businesses. As a percentage of revenue, personnel costs decreased to 59.5% for the twelve months ended December 31, 2005 from 62.5% for the comparable period in 2004. Direct costs (which consist primarily of product costs associated with hardware sales in the technology businesses) increased $2.1 million to 13.8% of revenue for the twelve months ended December 31, 2005 from 11.8% of revenue for the comparable period in 2004. Direct costs increased as a percentage of revenue, and personnel costs decreased as a percentage of revenue, as a larger portion of revenue was derived from product sales during the twelve months ended December 31, 2005 than in the comparable period of 2004. Occupancy costs are relatively fixed in nature and decreased as a percentage of revenue to 4.8% for the twelve months ended December 31, 2005, from 6.4% for the comparable period in 2004. The decrease in occupancy costs as a percentage of revenue resulted from a combination of revenue growth and the shutdown of unprofitable facilities. CBIZ closed facilities in the mergers and acquisition and valuation businesses in June 2004, as well as an unprofitable office in the valuation business during the first quarter of 2005.
Gross margin as a percent of revenue increased by 1.7% for the twelve months ended December 31, 2005 from the twelve months ended December 31, 2004, primarily as the result of growth in the technology businesses and operational efficiencies in the valuation business. Due to the unpredictable nature of the mergers and acquisitions business, CBIZ expects gross margin for 2006 to be in line with 2005 levels.
21
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenue
The following table summarizes total revenue for the twelve months ended December 31, 2004 and 2003 (in thousands, except percentages).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | | | % of | | | | | % of | | | $ | | | % | |
| | | 2004 | | | Total | | | 2003 | | | Total | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | | | |
Same-unit revenue | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounting, Tax and Advisory | | $ | 206,537 | | | | 40.9% | | | $ | 199,673 | | | | 41.5% | | | $ | 6,864 | | | | 3.4% | |
| Benefits and Insurance | | | 139,096 | | | | 27.5% | | | | 138,554 | | | | 28.7% | | | | 542 | | | | 0.4% | |
| |
| CBIZ MMP | | | 87,261 | | | | 17.3% | | | | 75,785 | | | | 15.7% | | | | 11,476 | | | | 15.1% | |
| National Practices — Other | | | 62,499 | | | | 12.4% | | | | 58,497 | | | | 12.1% | | | | 4,002 | | | | 6.8% | |
| | | | | | | | | | | | | | | | | | | |
| | Total National Practices | | | 149,760 | | | | 29.7% | | | | 134,282 | | | | 27.8% | | | | 15,478 | | | | 11.5% | |
| | | | | | | | | | | | | | | | | | | |
| | | Total same-unit revenue | | | 495,393 | | | | 98.1% | | | | 472,509 | | | | 98.0% | | | | 22,884 | | | | 4.8% | |
| | Acquired businesses | | | 9,505 | | | | 1.9% | | | | — | | | | | | | | 9,505 | | | | | |
| | Divested operations | | | — | | | | | | | | 9,745 | | | | 2.0% | | | | (9,745 | ) | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | Total revenue | | $ | 504,898 | | | | | | | $ | 482,254 | | | | | | | $ | 22,644 | | | | 4.7% | |
| | | | | | | | | | | | | | | | | | | |
Same-unit revenue growth was 4.8% for the twelve months ended December 31, 2004 from the comparable period in 2003. A detailed discussion of revenue by practice group is included under “Operating Practice Groups” below.
Expenses
Operating expenses increased to $438.4 million for the year ended December 31, 2001, representing a
decrease2004, from $419.9 million for the comparable period in 2003, an increase of $12.6$18.5 million or 2.4%4.4%. The decrease inAs a percent of revenue, attributable to
divestitures completed duringoperating expenses (excluding consolidation and integration charges) were 86.3% and 86.7% for the yearyears ended December 31, 20022004 and 2003, respectively. The primary components of operating expenses are personnel costs and occupancy expense, representing 80.3% and 80.5% of total operating expenses and 69.7% and 70.1% of revenue for the years ended December 31, 2004 and 2003, respectively. A more comprehensive analysis of operating expenses (excluding consolidation and integration charges) and their impact on gross margin is discussed by operating practice group below.
Consolidation and integration charges are reported as operating expenses in the accompanying consolidated statements of operations, and increased as a percent of revenue to 0.5% from 0.4% for the years ended December 31, 2004 and 2003, respectively. The increase in consolidation and integration charges was due primarily to real estate leasing costs in the Chicago market during 2004.
Corporate general and administrative expenses increased to $24.1 million. For business units with a full periodmillion or 4.8% of operationsrevenue for the year ended December 31, 2002 revenue increased $11.62004, from $18.7 million or 2.3%. A more comprehensive
analysis3.9% of revenue is discussed above by operating practice groups.
Expenses
Operatingfor the comparable period in 2003. The increase in corporate general and administrative expenses in 2004 versus 2003 was primarily the result of an increase in legal expenses, settlements (net of recoveries), and litigation reserves of approximately $3.2 million, to address several long-standing litigation issues. Additionally, CBIZ incurred approximately $1.0 million in expenses during 2004 associated with its compliance efforts in connection with Section 404 of the Sarbanes-Oxley Act of 2002.
Depreciation and amortization expense decreased to
$445.7$16.0 million for the year ended December 31,
2002,2004, from
$447.5$16.6 million for the comparable period in
2001, representing2003, a decrease of
$1.8 million.$0.6 million, or 3.4%. The decrease
wasis primarily attributable to the
divestiture of low-margin businesses,shift from purchasing computer-related items and furniture to leasing such items. These operating lease costs are recorded 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, restructuringrather than capitalized and
inventory adjustments. As a result of expense reductionsrecorded as depreciation, and
continuing
consolidation activities, CBIZ incurred severance and restructuring costs of
$4.6total $2.5 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 valuation2004 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 88.4%
compared to 86.6% for the year ended December 31, 2001, representing an increase
of 1.8%.
17
Corporate general and administrative expenses decreased to $19.7$1.6 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 0.5%. 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 coverage
issues, and other cases in which CBIZ is involved, have increased. Corporate
general and administrative expenses represented 3.9% of total revenues for the
year ended December 31, 2002, compared to 3.8% for the comparable period in
2001.
Depreciation and amortization expense decreased to $20.7 million for the
year ended December 31, 2002, from $40.6 million for the comparable period in
2001, representing a decrease of $19.9 million, or 49.0%. 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, 2001.2003. As a percentage of revenue, depreciation and amortization expense (excluding goodwill amortization)
decreased to 4.1%was 3.2% and 3.4% for the yearyears ended December 31, 2002 from 3.6% for the
comparable period in 2001.
2004 and 2003, respectively. Other Income and Expense
Interest expense decreasedincreased to $2.5$1.5 million for the year ended December 31, 2002,2004, from $6.8$1.1 million for the samecomparable period in 2001, a decrease2003, an increase of $4.3$0.4 million, or 63.5%42.8%. The decrease isincrease in interest expense was the result of both lowerhigher average outstandingdebt of $40.9 million during the year ended December 31, 2004, compared to $18.2 million
22
during the year ended December 31, 2003. Higher debt during 2004 was primarily due to share repurchase activity. The increase in interest expense due to higher average debt balances andwas offset by a lowerdecrease in average interest rates to 3.5% for the year ended December 31, 2004 from 4.4% for the year ended December 31, 2003. Additionally, interest expense for year ended December 31, 2003 included fees related to an interest rate in 2002. The average debt balanceswap that was $38.6terminated during the second quarter of 2003.
Gain on sale of operations, net was $1.0 million for the year ended December 31, 2002 compared2004, and was related to $84.7the sale of two operations and three client lists from the ATA practice group, and a client list from the B&I practice group. For the year ended December 31, 2003, gain on sale of operations, net was $2.5 million and related primarily to the sale of Health Administrative Services from the B&I practice group. Three businesses from the ATA practice group were also sold during the year ended December 31, 2003.
CBIZ reported other income of $3.5 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, 20022004, compared to 7.6% for the same
period in 2001.
CBIZ recorded a net gain from divested operationsother expense of $0.9$1.2 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
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 $5.02003, an increase $4.7 million. Other income (expense), net is comprised primarily of interest income earned in CBIZ'son funds held for clients at CBIZ’s payroll business, adjustments to the fair value of assets held in a rabbi trust related to the deferred compensation plan implemented in the first quarter of 2004, 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 decreasechange in other income (expense), net is for the year ended December 31, 2004 from the year ended December 31, 2003 was primarily attributablerelated to a$2.8 million of impairment charges to notes receivable during the year ended December 31, 2003 that did not recur in 2004. Of those impairment charges, $2.4 million charge related to the write-downimpairment 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 impairedfiled bankruptcy in 2002. In addition,2003. Additionally, other income for the year ended December 31, 2004 included approximately $0.4 million of interest income decreased $1.3related to a tax refund that is discussed in further detail below, and approximately $0.4 million related to lower interest rates in 2002.
the deferred compensation plan that was implemented during the first quarter of 2004.
Income Taxes
CBIZ recorded income tax expense from continuing operations of $8.1$8.0 million for the year ended December 31, 2002,2004, compared with $12.2to $11.9 million in 2001. The
effective tax rate was 51.8% for the year ended December 31, 2002.2003. The effective tax rate decreased to 27.4% for the year ended December 31, 2004, from 43.8% for the comparable period in 2003. The effective tax rate for the year ended December 31, 2002, is2004 was lower than statutory federal and state tax rates of approximately 40.0% due to a $3.5 million net tax benefit related primarily to a favorable tax position which was successfully resolved upon completion of the Internal Revenue Service examination for the years ended December 31, 1998, 1999, and 2000. The effective tax rate for the year ended December 31, 2003 was higher than the statutory federal and 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 rates40.0%, primarily due to the
significant amount of goodwill amortization expense, the majority of which iscapital losses resulting from certain impairment charges that were not offset by capital gains and thus were not deductible in the period.
Operating Practice Groups
Accounting, Tax and Advisory Services.
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 206,537 | | | $ | 199,673 | | | $ | 6,864 | |
| | Acquired businesses | | | 5,473 | | | | — | | | | 5,473 | |
| | Divested operations | | | — | | | | 2,396 | | | | (2,396 | ) |
| | | | | | | | | | |
| | | Total revenue | | | 212,010 | | | | 202,069 | | | | 9,941 | |
| Operating expenses | | | 182,564 | | | | 176,594 | | | | 5,970 | |
| | | | | | | | | | |
| Gross margin | | $ | 29,446 | | | $ | 25,475 | | | $ | 3,971 | |
| | | | | | | | | | |
| Gross margin percent | | | 13.9 | % | | | 12.6 | % | | | 1.3 | % |
Same-unit revenue for
the twelve months ended December 31, 2004 increased by $6.9 million or 3.4% from the twelve months ended December 31, 2003. The growth experienced in same-unit revenue was primarily due to an increase in the aggregate number of hours charged to clients for litigation support and Sarbanes-Oxley consulting services, combined with modest price increases for traditional accounting and tax
purposes.
18
COMPARISON OF YEAR ENDED DECEMBERservices. The growth in revenue from acquisitions was primarily from Sarbanes-Oxley consulting services provided by CBIZ Harborview, which 23
was acquired in September 2003, as well as accounting services provided by firms in Denver, Colorado, and Orange County, California. Divested operations represent several smaller units that did not provide opportunity for growth and cross-serving capabilities.
The largest components of operating expenses for the ATA group were personnel costs, occupancy costs and professional service fees paid to third parties, representing 88.1% and 87.2% of total operating expenses for the years ended December 31, 2001 TO YEAR ENDED DECEMBER2004 and 2003, respectively. Personnel costs increased $3.2 million primarily due to increases in staff to accommodate revenue growth, as well as annual increases in compensation rates. As a percentage of revenue, personnel costs were 66.6% and 68.3% for the years ended December 31, 2000
Revenues
Total2004 and 2003, respectively. The decrease in personnel costs as a percentage of revenue was the result of improved utilization of personnel. Occupancy costs, which are generally fixed in nature, were 7.0% and 7.2% of revenue for the years ended December 31, 2004 and 2003, respectively. Professional service fees paid to third parties increased $3.3 million to 2.3% percent of revenue for the year ended December 31, 20012004 from 0.8% for the same in 2003, as the result of outsourced professional services utilized primarily at two business units; one unit that delivers services requiring specialization in state agency compliance and CBIZ HarborView that delivers Sarbanes-Oxley consulting services.
Gross margin improved by 1.3% for the twelve months ended December 31, 2004 over the comparable period in 2003, primarily due to growth in Sarbanes-Oxley consulting services, as well as modest increases in hourly billing rates.
Benefits and Insurance Services.
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 139,096 | | | $ | 138,554 | | | $ | 542 | |
| | Acquired businesses | | | 2,162 | | | | — | | | | 2,162 | |
| | Divested operations | | | — | | | | 5,455 | | | | (5,455 | ) |
| | | | | | | | | | |
| | | Total revenue | | | 141,258 | | | | 144,009 | | | | (2,751 | ) |
| Operating expenses | | | 112,987 | | | | 112,136 | | | | 851 | |
| | | | | | | | | | |
| Gross margin | | $ | 28,271 | | | $ | 31,873 | | | $ | (3,602 | ) |
| | | | | | | | | | |
| Gross margin percent | | | 20.0 | % | | | 22.1 | % | | | (2.1 | )% |
On a same-unit basis, the Benefits and Insurance (B&I) group experienced an increase in revenue of $0.5 million, or 0.4% for the twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003. This growth was $516.9the result of strength in our core retail businesses, primarily group health and welfare, offset by a decline in revenue at a national business unit that specialized in bank-owned life insurance. The growth in revenue from acquired businesses was provided by firms in Chicago, Illinois, Salt Lake City, Utah and Owings Mills, Maryland, that specialize in group benefits and property and casualty services. The decline in revenue from divested operations was primarily the result of Health Administration Services which was sold in May 2003.
The largest components of operating costs for the B&I group were personnel costs, commissions paid to third party brokers, and occupancy costs, representing 86.3% and 86.4% of total operating expenses in 2004 and 2003, respectively. Personnel costs increased as a percentage of revenue to 55.4% from 53.4%, primarily as a result of investments in sales and support personnel intended to promote organic growth. Commissions paid to third party brokers increased to 7.8% of revenue in 2004 from 7.7% in 2003, primarily due to a higher portion of revenue being generated with third party brokers during 2004 than in 2003. Occupancy expenses are relatively fixed in nature, but decreased as a percent of revenue to 5.8% for the twelve months ended December 31, 2004, from 6.1% for the comparable period in 2003, primarily as the result of cost savings realized from office consolidation and integration activities that occurred during the year.
Goss margin decreased in 2004 compared to 2003, primarily as the result of the decline in revenue experienced by the national business unit described above. A large portion of this unit’s costs are fixed in the short term, thus resulting in a negative impact to margins when revenue declined. The growth in revenue experienced by our core retail businesses did not result in a similar favorable impact on gross margin, as the retail business units have a more variable cost structure.
24
CBIZ Medical Management Professionals (CBIZ MMP).
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 87,261 | | | $ | 75,785 | | | $ | 11,476 | |
| | Acquired businesses | | | — | | | | — | | | | — | |
| | Divested operations | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| | | Total revenue | | | 87,261 | | | | 75,785 | | | | 11,476 | |
| Operating expenses | | | 71,885 | | | | 61,566 | | | | 10,319 | |
| | | | | | | | | | |
| Gross margin | | $ | 15,376 | | | $ | 14,219 | | | $ | 1,157 | |
| | | | | | | | | | |
| Gross margin percent | | | 17.6 | % | | | 18.8% | | | | (1.2% | ) |
CBIZ MMP revenue increased by $11.5 million, or 15.1%, for twelve months ended December 31, 2004 as compared to $551.2the twelve months ended December 31, 2003. Approximately $4.2 million of the growth was attributable to new clients obtained during 2004. The remaining revenue growth was the result of the maturation of clients obtained in 2003 and strong existing client sales.
The largest components of operating expenses for CBIZ MMP were personnel costs, occupancy costs and office expenses (primarily postage), representing 88.9% and 90.0% of total operating expenses for the years ended December 31, 2004 and 2003, respectively. Personnel costs increased by $7.7 million to 58.9% of revenue for the year ended December 31, 2004, from 57.6% of revenue for the year ended December 31, 2003. This increase was directly related to an increase in the number of client service staff employed by MMP during 2004 versus 2003, required to support the growth in revenue. Additionally, MMP added personnel in compliance and technology to support the infrastructure and to position the unit for continued growth. Occupancy costs as a percentage of revenue were 6.7% and 7.1%, for the years ended December 31, 2004 and 2003, respectively. Office expenses for the twelve months ended December 31, 2004 increased 5.9% from the comparable period in 2003 in response to overall growth of the unit.
Gross margin declined in 2004 from 2003, primarily as a result of investments in additional staff to support and facilitate growth.
National Practice Services — Other.
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2004 | | | 2003 | | | Change | |
| | | | | | | | | | |
| | | (Dollars in thousands) | |
| Revenue | | | | | | | | | | | | |
| | Same-unit | | $ | 62,499 | | | $ | 58,497 | | | $ | 4,002 | |
| | Acquired businesses | | | 1,870 | | | | — | | | | 1,870 | |
| | Divested operations | | | — | | | | 1,894 | | | | (1,894 | ) |
| | | | | | | | | | |
| | | Total revenue | | | 64,369 | | | | 60,391 | | | | 3,978 | |
| Operating expenses | | | 57,208 | | | | 61,176 | | | | (3,968 | ) |
| | | | | | | | | | |
| Gross margin | | $ | 7,161 | | | $ | (785 | ) | | $ | 7,946 | |
| | | | | | | | | | |
| Gross margin percent | | | 11.1 | % | | | (1.3 | )% | | | 12.4 | % |
On a same-unit basis, the National Practices group, excluding CBIZ MMP, experienced higher revenues of $4.0 million for the year ended December 31, 2000, representing a
decrease of $34.3 million, or 6.2%. The decrease in revenue was primarily
attributable2004 as compared to (i) divestitures completed during the year ended December 31, 2001, and (ii) lower than expected2003. Approximately $2.1 million of the same-unit revenue resulting from generally weak
economic conditions. The decrease in revenuesgrowth was attributable to divestituresthree transactions that closed during the first six months of 2004 in CBIZ’s mergers and acquisition business. The remainder of the increase was $30.9 million. Forprimarily from our payroll processing unit and valuation business. The payroll processing unit made investments in their business unitsprocesses and systems during 2003 to position the unit for growth. These investments, along with a full period of operations for the years
ended December 31, 2001 and 2000,increased client satisfaction (evidenced by higher than anticipated retention rate), resulted in favorable revenue decreased $3.4 million. For the period
of September through December, the company experiencedresults in 2004 as compared to 2003. This increase was offset by lower revenues in most of
itsCBIZ’s technology and health care consulting businesses in 2004. Revenue from acquired businesses was provided by a technology business units due to weak economic conditions. Lower revenues were
particularly significantlocated in several lines of business including ten business
units which provide capital markets, IT and other consulting services. Same-unit
revenue in these business units fell $17.2 million, or 20.9% in 2001 compared to
2000. During the fourth quarter, same-unit revenueCleveland, Ohio. Revenue from these business units
declined by $6.1 million, or 30.7% compareddivested operations related to the fourth 2000.
Expenses
Operatingclosure of unprofitable locations in the technology businesses during 2003.
25
The largest components of operating expenses for the National Practices Services — Other segment were personnel costs, direct costs and occupancy costs, representing 90.8% and 89.9% of total operating expenses in 2004 and 2003, respectively. Personnel costs decreased by $2.2 million, and decreased as a percentage of revenue to $447.5 million62.5% for the year ended December 31, 2001,2004, from $490.6 million for the comparable period in 2000, representing a
decrease of $43.1 million, or 8.8%. Such decrease was primarily attributable to
reductions in personnel costs of $15.5 million, facility costs of $1.3 million,
and the reduction in bad debt expense of $17.4 million. These reductions in
expenses were primarily from ongoing operations, although a portion of the
reductions are a result of divestitures completed subsequent to December 31,
2000. Other operating costs such as commission expense and product costs have
also decreased due to decreased revenue. As a percentage of revenue, operating
expenses70.2% for the year ended December 31, 2001 were 86.6% compared2003. The decrease was primarily the result of a reduction in personnel related to 89.0%the closure of unprofitable locations in the mergers and acquisitions group. Direct costs primarily consisted of product costs associated with hardware sales in the technology businesses. These costs decreased by $0.7 million, and decreased as a percentage of revenue to 11.8% for the year ended December 31, 2000, representing a decrease of 2.4%.
Corporate general and administrative expenses decreased to $19.8 million2004, from 13.7% for the year ended December 31, 2001, from $24.7 million for the comparable
period in 2000, representing a decrease of $4.9 million, or 19.8%. Such2003. The decrease was attributableprimarily a result of lower product costs at our technology division due to lower personnelthe closure of unprofitable locations during 2003. Occupancy costs are generally fixed in nature and decreased as a percentage of $1.2 million and lowerrevenue to 6.4% in 2004 from 7.1% in 2003, primarily as a result of the shutdown of unprofitable facilities in the technology expenditures of $2.8 million. Corporate general and administrative expenses
represented 3.8% of total revenuesbusinesses described above.
The improvement in gross margin for the year ended December 31, 2001,
compared to 4.5% for the comparable period in 2000.
Depreciation and amortization expense decreased to $40.6 million for2004 from the year ended December 31, 2001, from $43.3 million for2003 was realized as the comparable period in
2000, representing a decrease of $2.7 million, or 6.2 %. The decrease is
primarily attributable to lower goodwill amortization of $4.1 million as a result of goodwill impairment recordedclosing unprofitable locations in the fourth quartertechnology businesses and discontinuing unprofitable product lines, combined with the three mergers and acquisitions transactions as previously discussed, and improvements and operational efficiencies in the payroll, technology and valuation businesses.
Results of 2000Operations — Discontinued Operations
During 2005, CBIZ closed an operation from the Accounting, Tax and Advisory practice group, and sold a reductionbusiness unit from the Benefits and Insurance practice group. In addition, CBIZ committed to the divestiture of a business unit in goodwill relatedthe National Practices — Other practice group. CBIZ plans to divestures completeddivest of this business in 2000 and 2001. The
decrease was primarily offset by an increase in depreciation expense related to
capital expenditures, a significant amounttwo portions, one of which occurred in 2000,will be sold and the other which were
primarily related to consolidation efforts. As a percentage of revenue,
depreciation and amortization expense increased to 7.9%will be closed. The National Practices business unit is classified as available for sale at December 31, 2005.
During the year ended December 31,
20012004, CBIZ divested of three business operations; two business units from
7.9% for the
comparable period in 2000.
Interest expense decreased to $6.8 million forAccounting, Tax and Advisory practice group were divested through a sale and a closure, and a business unit from the
year ended December 31,
2001, from $12.1 million for the same period in 2000, a decrease of $5.3
million, or 43.9%. The decrease is a result ofNational Practices — Other practice group was closed. During 2003, CBIZ
paying down its bank debt
during 2001 from $117.5 million to $55 million, a reduction in debt of $62.5
million. Additionally, CBIZ's average interest rate on bank debt dropped
throughout 2001. The weighted average interest rate on bank debt was 7.6% for
the year ended December 31, 2001 compared to 8.7% for the same period in 2000,
and includes the effect of the interest rate swap in 2001.
CBIZ recorded a loss on sale of operations of $7.1 million for the year
ended December 31, 2001, as compared to $31.6 million for the year ended
December 31, 2000. Such charges in 2001 are relatedcommitted to the
sale or closing of
fifteen operations for an aggregate price of $16.5 million, which included $14.0
million of cash, $2.4 million of notes receivables, and $0.1 million in CBIZ
stock. In addition to an estimated loss related to the planned divestiture of five
additionaland divested of six business
units to be completed in 2002. Such charges in 2000
were the result of the divestiture of four operations,
including three business
units previously announced in
19
December 1999, the(of which one was available for sale of CBIZ's franchise operations for $3.8 million and an
estimated loss of $27.2 million related to the planned divestiture of two
additional business units to be completed in 2001.
Other income (expense), net was $3.9 million of income for the year endedat December 31, 2001, as compared to $5.8 million of expense2002). There were no businesses available for the comparable
period in 2000, representing a change of approximately $9.8 million. In 2001,
other expense is comprised primarily of $2.7 million of interest income and $2.2
million of miscellaneous income offset by $0.6 million of loss on sale of assets
and $0.4 million of other expenses. In 2000, other expense is comprised
primarily of $1.6 million impairment of note received in connection with the
sale on environmental properties in 1997, $3.8 million related to the settlement
of and reserve for certain legal proceedings, $0.4 million related to the
closing of operations; and $2.7 million related to software and other asset
impairment, offset by interest income of $3.9 million.
CBIZ recorded income tax expense from continuing operations of $12.2
million for the year endedat December 31, 2001, compared with an income tax
expense of $1.5 million in 2000. CBIZ expensed goodwill amortization of $21.9
million in 2001, a majority of which was not deductible for tax purposes. In
addition, CBIZ reduced goodwill by $13.8 million in 2001 in connection with
divestures, of which $11.4 million was not deductible for tax purposes. As a
result of these adjustments, CBIZ's taxable income was significantly higher than
the $1.0 million pretax loss reported, resulting in a tax expense of $12.2
million.
RESULTS OF OPERATIONS -- DISCONTINUED OPERATIONS
During 2002, CBIZ adopted formal plans to divest five non-core operations
which were no longer part of CBIZ's strategic long-term growth objectives. 2004 or 2003. These operations were classifiedqualified for treatment as discontinued operations, and have been classified as such in connectionaccordance with the
adoption of Statement of Financial Accounting Standards No.(SFAS) 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,"” and EITF No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets in Determining Whether to Report Discontinued Operations”. Accordingly, the net assets, and liabilities, and results of operations of these businesses are reported separately in the consolidated financial statements. Fourstatements included herewith. Based upon the sales proceeds and costs of these operations were either sold or
closed as of December 31, 2002. One operation remains available for sale as of
December 31, 2002, and the sale is expected to be completed within one year.
Based on the estimated cost of closure, and purchase price, CBIZ recorded a lossgain on disposal fromof discontinued operations, net of tax, of $2.5$3.6 million, $0.1 million and $0.7 million for the yearyears ended December 31, 2002.2005, 2004, and 2003 respectively. Revenue associated with these five discontinued operations for the years ended December 31, 2002, 20012005, 2004 and 20002003 was $7.2$6.0 million, $10.0$18.5 million and $16.6$37.0 million, respectively. The loss from operations of these discontinued operations, net of tax, associated with these divestitures for the years ended December 2002, 200131, 2005, 2004 and 20002003 was $1.9$6.5 million, $2.8$5.4 million and $15.8$0.7 million, respectively.
During 2000, CBIZ completed the sale of its risk-bearing specialty
insurance segment, as well as American Inspection and Audit Services, Inc. and
CSC Insurance Agency, Inc., collectively referred to as the Divested Entities,
for $28 million, resulting in a loss on disposal of discontinued businesses, net
of tax of $5.7 million. These Divested Entities were classified as discontinued
operations in 2000 under APB Opinion 30, the accounting literature for
discontinued operations then in effect. For the year ended December 31, 2000
revenue associated with these discontinued operations was $22.6 million and the
related loss from operations, net of tax, was $1.2 million.
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 a
cumulative effect of a change in accounting principle net of tax benefit of $8.6
million.
During the fourth quarter of 2000, CBIZ adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
the Financial Statements." SAB 101 summarizes certain of the Commission's views
in applying generally accepted accounting principles to revenue recognition in
20
financial statements. In light of the guidance to conform to SAB 101 and the
SEC's "Frequently Asked Questions and Answers" bulletin released on October 12,
2000, CBIZ changed certain revenue recognition policies effective January 1,
2000. Prior to this change CBIZ's revenue recognition had been in accordance
with GAAP and industry standards. Due to this change, CBIZ recorded a cumulative
adjustment in the first quarter 2000 of $11.9 million (net of tax benefit of
$7.9 million). The impact in 2000 of adopting SAB 101 resulted in a reduction in
revenue of approximately $18.2 million, a reduction in operating expense of
approximately $11.4 million, and a reduction in income from continuing
operations (before cumulative effect of accounting change) of approximately $6.8
million (pretax).
FINANCIAL CONDITION
Condition Total assets were $433.1$454.6 million, and total liabilities were $138.8$199.9 million and shareholders equity was $254.7 million as of December 31, 2002 and shareholders equity was $294.3 million.2005. Current assets of $202.7$209.2 million exceeded current liabilities of $116.4$153.4 million by $86.3
million at December 31, 2002.
$55.8 million.
Cash and cash equivalents increased $2.0$3.6 million to $6.4$8.9 million for the year ended December 31, 2002.2005. Restricted cash was $17.0$9.9 million at December 31, 2002, an increase2005, a decrease of $3.6$0.2 million from a year ago.December 31, 2004. Restricted cash represents those funds held in connection with CBIZ's NASDCBIZ’s securities regulated operations and funds held in connection with the pass through of insurance premiums from our clients to the carrier.
As further describedrespective carriers. Cash and restricted cash fluctuate during the year based on the timing of cash receipts and related payments.
Accounts receivable, net were $99.2 million at December 31, 2005, an increase of $0.2 million from December 31, 2004. The slight increase in note 1accounts receivable is attributed to the consolidated financial statements
contained herein, fundsincrease in revenue from internal growth and acquisitions, offset by an improvement in collections from a year ago. Days sales outstanding (DSO) represents trade accounts receivable (before the allowance for doubtful accounts) and unbilled revenue
26
(net of realization adjustments) at the end of the period, divided by daily revenue. 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. DSO for continuing operations was 67 days at December 31, 2005, a 6 day improvement from 73 days at December 31, 2004.
Other current assets increased by $1.5 million at December 31, 2005 from December 31, 2004, primarily due to an increase in prepaid expenses offset by a decrease in interest receivable. The increase in prepaid expenses was attributable to the timing of insurance premium payments; the decrease in interest receivable relates to a tax refund that was received in February 2005.
Income taxes recoverable at December 31, 2004 includes the expected refund related to a favorable tax position which was successfully resolved upon completion of the IRS examination of tax years 1998-2000. The tax refund was received in February 2005.
Funds held for clients were $49.2 million, which isare directly offset by client fund obligations. Cash, restricted cash and fundsFunds held for clients fluctuate during the year based on the timing of cash receipts and related payments. Accounts receivable were $103.0 million at December 31, 2002,payments, and declined by $9.7 million from a year ago. The declineare further described in receivables was dueNote 1 to the improvement in collection of amounts due, divestitures, and the write-off
of certain accounts that were deemed uncollectible. Other assets, including
notes receivable and property and equipment, are carried at amounts that CBIZ
reasonably estimates reflect the value of these assets, considering current
circumstances and future expectations. accompanying consolidated financial statements.
Goodwill and other intangible assets, net of accumulated amortization, decreased $83.4increased by $12.9 million primarilyat December 31, 2005 from December 31, 2004. Acquisitions, including contingent consideration earned, resulted in a $15.5 million increase in goodwill and other intangible assets during the year ended December 31, 2005. This increase was offset by $2.6 million of amortization expense.
Assets of the deferred compensation plan represent participant deferral accounts. The assets are held in a rabbi trust and are directly offset by obligations of the plan, representing obligations due to impairment for goodwill of $88.6 million recorded in 2002 as a resultthe participants. Although the assets of the adoptionplan are specifically designated as available to CBIZ solely for the purpose of SFAS 142.
paying benefits under the deferred compensation plan, in the event that CBIZ became insolvent, the assets would be available to all unsecured general creditors. The plan is described in further detail in Note 11 of the accompanying consolidated financial statements.
The accounts payable balance of $22.5$26.4 million at December 31, 20022005 reflects amounts due to suppliers and vendors. Other current liabilities increased $5.3
million to $37.7vendors; balances fluctuate during the year based on the timing of cash payments. Accrued personnel costs of $35.9 million at December 31, 2002. The change primarily reflects2005 represent amounts due for payroll, payroll taxes, employee benefits and incentive compensation; balances fluctuate during the recordingyear based on the timing of anticipated costs related to restructuringpayments and accruedour estimate of incentive compensation expense. Client fund obligations of $49.2 million were directly related to funds
held for clients in the same amount as reflected in current assets. CBIZ's
credit facility was $17.5costs. Incentive compensation is described more fully under “Critical Accounting Policies — Incentive Compensation” below.
Other liabilities (current and non-current) increased by $3.6 million at December 31, 2002, a reduction of $37.5
million2005 from December 31, 2001.2004. The reductionincrease in debt was aother liabilities relates primarily to amounts owed by CBIZ as contingent proceeds earned by acquired businesses. The increase is also the result of CBIZ's
positivedifferences between cash flow generated during 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided bypayments required under various operating activitiesleases, versus rent expense which is recognized on a straight-line basis.
Income taxes payable of $1.1 million at December 31, 2005 represents our estimate of taxes due on current year income. At December 31, 2004, CBIZ recorded income taxes recoverable of $7.1 million, which is discussed in
2002 was $42.3 million versus
$55.6 million in 2001, a decrease of $13.3 million. Net cash provided by
operating activities was the principal source of funds used to reduce CBIZ's
bank debt by $37.5 million.
Net cash used in investing activities during 2002 of $3.0 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 the
acquisition of a benefits and insurance firm, and funding provided under the
HarborView agreement. 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 2001 of $1.2 million consisted of
$14.0 million in proceeds from the disposition of non-core and underperforming
business units and $0.2 million of collections on notes receivables. These
proceeds were offset by $12.7 million used for capital expenditures, $1.7
million used toward the acquisition of a technology services business and
contingent consideration for previous acquisitions (earn-outs),
21
and $1.0 million funding provided under the HarborView agreement. Capital
expenditures consisted of leasehold improvements and equipment in connection
with the consolidation of certain offices and equipment purchases in relation to
normal replacement.
further detail above. 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. On September 26, 20022005, CBIZ entered into a new senior secured
credit agreement with a group of four banks, as described below under "Sources
of Cash." CBIZ expects to use the facility for working capital, internal growth
initiatives, and its acquisition program.
Cash used in financing activities in 2001 of $66.1 million consisted
primarily of net reduction of $62.5 million in the revolving credit facility and
net payments of $3.2 million toward notes payable and capitalized leases. In
addition, approximately $0.4paid $29.3 million in cash for business acquisitions (initial consideration and additional consideration earned) and share repurchases, in addition to reducing the amount of outstanding debt under the credit facility to $32.2 million at December 31, 2005 from $53.9 million at December 31, 2004. Cash to fund acquisitions, share repurchases and the reduction in bank debt during the year ended December 31, 2005, was used towardprovided by CBIZ operations.
Stockholders’ equity increased $8.2 million in 2005 from 2004, primarily due to net income of $18.7 million, and the purchaseexercise of 170,000stock options which contributed $5.4 million. The increase in stockholders’ equity resulting from net income and stock option exercises was partially offset by share repurchases. During 2005, CBIZ repurchased 3.8 million shares of CBIZ's common stock which resulted in accordance with CBIZ's Share
Repurchase Program approved by the Board of Directors on August 8, 2001
SOURCES OF CASH
CBIZ'sa $16.7 million decrease in stockholders’ equity.
Liquidity and Capital Resources
CBIZ’s principal source of net operating cash is derived from the collection of fees and commissions from professional services rendered to its clients and
commissions earned in the areas of accounting, 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 solutions.
On September 26, 2002clients. In addition, CBIZ entered intosupplements net operating cash with a new senior secured credit agreement with a group of four banks.facility. The new $73$100.0 million facility carries an option to increase the facilitycommitment to $80$125.0 million,
27
and allows for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock. CBIZ expects to use the facility for working capital, internal
growth initiatives, and its acquisition program. The facility has a threefive year term with an expiration date of SeptemberAugust 2009.
At December 31, 2005, CBIZ had $32.2 million outstanding under its credit facility, as well as letters of credit and guarantees totaling $4.4 million. Available funds under the facility based on the terms of the commitment were approximately $54.1 million at December 31, 2005. The new credit agreement isfacility was secured by substantially all assets andof CBIZ, as well as the capital stock of CBIZ and its subsidiaries and allows
for greater operating flexibility as it pertains to acquisitions and the use of
funds for the repurchase of CBIZ stock.subsidiaries. Under the new credit agreement,facility, CBIZ is
subject to a monthly borrowing base related to accounts receivable and unbilled
revenues, and iswas 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 isbelieves it was in compliance with its covenants as of December 31, 20022005.
Effective February 13, 2006, CBIZ entered into a new $100.0 million unsecured credit facility, which replaced the previous facility. The new facility has an option to increase the commitment to $150.0 million, and projects thathas a five year term expiring in February 2011. In addition to providing lower borrowing costs, the new facility provides CBIZ with greater flexibility in regards to on-going corporate initiatives. Specifically, the new facility removes limitations on share repurchases and acquisitions provided the leverage ratio (total debt compared to EBITDA as defined by the facility) is less than 2.0. CBIZ believes it will remainis in compliance in 2003.
At December 31, 2002, CBIZ had $17.5 million outstandingwith covenants under itsthe new credit facility. agreement.
Management believes thatcash generated from operations, combined with the available funds from the credit facility, along with cash generated from operations, will be sufficientprovides CBIZ the financial resources needed to meet its
liquidity needs inbusiness requirements for the foreseeable future.
See note 8 to CBIZ's consolidated financial statements included herewith.
USES OF CASH AND LIQUIDITY OUTLOOK
CBIZ'snext twelve months, including capital expenditures, from continuing operations totaled $8.2
million, $12.7 millionworking capital requirements, and $19.7 million for the years ended December 31, 2002,
2001 and 2000, respectively, which included expenditures for fixed assets for
normal replacement, implementation of the enterprise-wide solution to integrate
back office operations and other initiatives, office consolidations, compliance
with regulations and market development. During the year ended December 31,
2002, CBIZ principally funded capital expenditures from operating cash flow and
financing activities. In 2003, capital expenditures are expected to be
approximately $7.5 million, and CBIZ anticipates that during 2003, it will
continue to fund these expenditures from operating cash flow supplemented by
borrowings under its revolving credit agreement, as necessary.
At December 31, 2002, based on the borrowing base calculation, CBIZ had
approximately $36.0 million of available funds under its credit facility.
Management believes that those 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,
strategic investments.
CBIZ may also obtain funding by offering securities or debt, through
the public
markets or
the private markets. CBIZ currently has a number of shelf registrations
22
active, under which weit can offer such securities. See noteNote 12 to the consolidated financial statements contained hereinincluded herewith for a description of these shelf registration statements.Sources and Uses of Cash
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Cash provided by operating activities represents net income adjusted for certain non-cash items and changes in assets and liabilities. During 2005, cash provided by operating activities was $52.8 million compared to $19.7 million in 2004. The increase of $33.1 million in cash provided by operating activities in 2005 was primarily due to a decrease in the aforementioned registration filings.
CBIZ'schange in income taxes of $13.2 million, a decrease in the change in accounts receivable, net, of $6.4 million, and an increase in the change in accrued personnel costs of $7.4 million. The decrease in income taxes due was related to a $4.0 million refund received during 2005, combined with the overpayment of taxes during 2004, which were used to reduce 2005 tax payments.
Cash flows from investing activities consist primarily of payments toward capital expenditures and business acquisitions, proceeds from divested operations and the collection of notes receivable. CBIZ used $14.3 million in net cash for investing activities during 2005, compared to $8.6 million during 2004. Investing uses of cash during 2005 primarily consisted of $12.6 million of net cash used towards business acquisitions and $6.9 million for capital expenditures (net), offset by $2.1 million in proceeds from discontinued and divested operations and $1.7 million in net collections on notes receivable. Investing uses of cash during 2004 primarily consisted of $5.7 million of net cash used toward business acquisitions and $7.4 million for capital expenditures (net), offset by $4.6 million in proceeds from discontinued and divested operations and $0.2 million in net collections on notes receivable. Capital expenditures primarily consisted of technology investments, as well as leasehold improvements and equipment purchased in connection with the consolidation of certain offices.
Cash flows from financing activities consist primarily of net borrowing and payment activity from the credit facility, repurchases of CBIZ common stock, net borrowing and payment activity toward notes payable and capitalized leases, and proceeds from the exercise of stock options. Net cash used in financing activities during the year ended December 31, 2005 was $35.0 million compared to $9.6 million for the comparable period in 2004. Financing uses of cash during 2005 included $21.7 million in net payments towards the credit facility, $16.7 million in cash used to purchase 3.8 million shares of CBIZ common stock, and $0.8 million in net payments towards notes payable and capitalized leases, offset by $4.2 million in proceeds from the exercise of stock options. During 2004, financing uses of cash included $50.4 million in cash used to repurchase 10.4 million shares of CBIZ common stock through a tender offer and open market purchases, and $0.4 million in net payments towards notes payable and capitalized leases, offset by $39.9 million in net proceeds from the credit facility and $1.4 million in proceeds from the exercise of stock options.
28
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net cash provided by operating activities in 2004 was $19.7 million versus $38.9 million in 2003, a decrease of $19.2 million. The decrease in cash provided by operating activities was primarily due to an increase in the change in income taxes of $10.8 million, and a reduction in the change in accounts payable of $8.8 million during the year ended December 31, 2004 versus the comparable period in 2003. The increase in income taxes was attributable to deferred tax assets utilized in 2003 in connection with the divestiture of two non-core business units.
CBIZ used $8.6 million in net cash for investing activities during 2004, compared to $4.6 million during 2003. Investing uses of cash during 2004 primarily consisted of $5.7 million of net cash used toward business acquisitions and $7.4 million for capital expenditures (net), offset by $4.6 million in proceeds from discontinued and divested operations and $0.2 million in net collections on notes receivable. Investing uses of cash during 2003 primarily consisted of $3.8 million of net cash used toward business acquisitions and $10.4 million for capital expenditures (net), offset by $7.2 million in proceeds from discontinued and divested operations and $1.8 million in net collections on notes receivable. The decrease in cash used for capital expenditures (net) during 2004 versus 2003 was primarily attributable to the shift from purchasing computer-related equipment and furniture, to financing such equipment under operating leases.
Net cash used in financing activities during the year ended December 31, 2004 was $9.6 million compared to $36.9 million for the comparable period in 2003. During 2004, financing uses of cash included $50.4 million in cash used to repurchase shares of CBIZ common stock through a tender offer and open market purchases, and $0.4 million in net payments towards notes payable and capitalized leases, offset by $39.9 million in net proceeds from the credit facility and $1.4 million in proceeds from the exercise of stock options. During 2003, financing uses of cash included $3.5 million in net payments towards the credit facility, $33.6 million in cash used to repurchase shares of CBIZ common stock, and $0.7 million in net payments towards notes payable and capitalized leases, offset by $0.9 million in proceeds from the exercise of stock options.
Obligations and Commitments
CBIZ’s aggregate amount of future obligations for the next five years and thereafter is set forth below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | Thereafter | |
| | | | | | | | | | | | | | | | | | | | | | |
On-Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank debt(1) | | $ | 32,200 | | | $ | — | | | $ | — | | | $ | — | | | $ | 32,200 | | | $ | — | | | $ | — | |
| Notes payable | | | 6,309 | | | | 6,107 | | | | 8 | | | | 194 | | | | — | | | | — | | | | — | |
| Capitalized leases | | | 1,649 | | | | 626 | | | | 533 | | | | 418 | | | | 72 | | | | — | | | | — | |
| Restructuring lease obligations(2) | | | 12,268 | | | | 3,694 | | | | 2,858 | | | | 1,903 | | | | 1,194 | | | | 787 | | | | 1,832 | |
Off-Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-cancelable operating lease obligations(2) | | | 191,410 | | | | 33,309 | | | | 28,183 | | | | 25,312 | | | | 21,166 | | | | 18,797 | | | | 64,643 | |
| Letters of credit in lieu of cash security deposits | | | 2,027 | | | | 1,415 | | | | — | | | | — | | | | — | | | | 35 | | | | 577 | |
| License bonds and other letters of credit | | | 1,282 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,282 | |
| Performance guarantees | | | 2,398 | | | | 937 | | | | 1,025 | | | | 436 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 249,543 | | | $ | 46,088 | | | $ | 32,607 | | | $ | 28,263 | | | $ | 54,632 | | | $ | 19,619 | | | $ | 68,334 | |
| | | | | | | | | | | | | | | | | | | | | | |
2003 2004 2005 | |
| (1) | Represents the credit facility that existed at December 31, 2005. CBIZ entered into a new facility effective February 13, 2006, 2007 THEREAFTER
------- ------- ------- ------- ------- ----------
Principal payments of bank debt......... $ -- $ -- $17,500 $ -- $ -- $ --
Letters of credit....................... 681 636 286 -- -- 320
Principal payments of notes payable and
capitalized leases.................... 1,008 272 263 40 8 --
Obligationswhich has a five year term expiring February, 2011. |
|
| (2) | Excludes cash received under non-cancelable
operating leases...................... 22,318 19,480 15,316 13,863 12,610 62,836
------- ------- ------- ------- ------- -------
Total................................. $24,007 $20,388 $33,365 $13,903 $12,618 $63,156
======= ======= ======= ======= ======= =======
subleases. |
INTEREST RATE RISK MANAGEMENT
Off-Balance Sheet Arrangements
CBIZ entered intomaintains administrative service agreements with independent CPA firms (as described more fully under “Business Services — Accounting, Tax, and Advisory” above), which qualify as variable interest entities under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended. The impact to CBIZ of
29
this accounting pronouncement is not material to the financial condition, results of operations, or cash flows of CBIZ, and is further discussed in Note 1 to the consolidated financial statements included herewith.
CBIZ provides guarantees of performance obligations for a CPA firm with which CBIZ maintains an interest rate swap agreement inadministrative service agreement. Potential obligations under the third quarterguarantees totaled $2.4 million and $1.3 million at December 31, 2005 and 2004, respectively. In accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of 2001 to reduce the impactIndebtedness of potential rate increases on variable rate debt
through its credit facility. The interest rate swap was entered into withOthers”, as amended, CBIZ has recognized a notional amount of $25 million, a fixed LIBOR rate of 3.58%, and a maturity date
of August 2003. During 2002, primarily as a result of continued strong cash flow
from operations, CBIZ continued to reduce its outstanding debt; therefore, to
maintain an effective hedge CBIZ reduced the notional amount of the swap to $15
million. CBIZ accountsliability for the interest rate swap as a cash flow hedge, whereby the fair value of the interest rate swapobligations undertaken in issuing these guarantees. The liability is reflectedrecorded as an asset or liabilityother current liabilities in the accompanying consolidated balance sheet.sheets. CBIZ does not expect it will be required to make payments under these guarantees.
CBIZ provides letters of credit to landlords (lessors) of its leased premises in lieu of cash security deposits, which totaled $2.0 million and $2.9 million at December 31, 2005 and 2004, respectively. In addition, CBIZ provides bonds to various state agencies to meet certain licensing requirements. The amount of bonds outstanding at December 31, 2005 and 2004 were $1.2 million and $1.6 million, respectively.
CBIZ has various agreements under which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations, warranties, covenants or agreements, related to matters such as title to assets sold and certain tax matters. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, payments made by us under these agreements have not been material. As of December 31, 2005, we were not aware of any indemnification agreements that would require material payments.
Interest Rate Risk Management
CBIZ has used interest rate swaps to manage the interest rate mix of its credit facility and related overall cost of borrowing. Interest rate swaps involve the exchange of floating for fixed rate interest payments to effectively convert floating rate debt into fixed rate debt based on a one, three, or six-month U.S. dollar LIBOR. Interest rate swaps allow CBIZ to maintain a target range of fixed to floating rate debt. During June 2003, CBIZ paid its revolving credit facility balance down to zero, thus requiring it to terminate its interest rate swap, (hedging
instrument) matcheswhich 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%). During the notional amount,years ended December 31, 2005 and 2004, CBIZ did not utilize interest rate indexswaps. Management will continue to evaluate the potential use of interest rate swaps as it deems appropriate under certain operating and re-pricing
dates as those that exist undermarket conditions.
CBIZ invests funds held for clients in short-term investment grade instruments with a maturity of twelve months or less from the variable rate debt through its credit
facility (hedged item). Whendate of purchase. The interest income on these short-term investments mitigate the interest rate index is belowrisk for the fixed rate
LIBOR,borrowing costs of CBIZ’s credit facility, as the change in fair valuerates float based on market conditions and the average balances of the instrument represents a changerespective investments and debt are comparable in intrinsic value, which is an effective hedge. This portion of change in value
will be recorded as other comprehensive income (loss). For the year ended
December 31, 2002, the change in fair value resulted in a loss of approximately
$0.3 million, which is recorded as accumulated other comprehensive income (loss)
in stockholders' equity.
CRITICAL ACCOUNTING POLICIES
size.
Critical Accounting Policies
The policies discussed below are considered by management to be critical to the understanding of CBIZ'sCBIZ’s consolidated financial statements because their application places significant demand on management'smanagement’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
expected.
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 isassured. These criteria are in accordance with GAAPGenerally Accepted Accounting Principles (GAAP) and SAB
101.SEC Staff Accounting Bulletin No. 104 (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 --below.
Certain of our client arrangements encompass multiple deliverables. CBIZ accounts for these arrangements in accordance with Emerging Issues Task Force No. 00-21, “Accounting for Revenue Arrangements with Multiple
30
Deliverables” (EITF 00-21). If the deliverables meet the criteria in EITF 00-21, the deliverables are divided into separate units of accounting and revenue is allocated to the deliverables based on their relative fair values. Revenue for each unit is recognized separately in accordance with CBIZ’s revenue recognition policy for each unit. For those arrangements where the deliverables do not qualify as a separate unit of accounting, revenue from all deliverables are treated as one accounting unit and evaluated for appropriate accounting treatment based upon the underlying facts and circumstances.
Accounting, Tax and Advisory Services — Revenue consists primarily of fees for accounting services, preparation of tax returns, and consulting
services.services including Sarbanes-Oxley consulting and compliance projects. Revenues are recorded in the period in which
theyservices are
earned.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-pocketout-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.
23
BENEFITS & INSURANCE -- Through one of its ATA units, CBIZ provides flexible benefits administration services to clients, grants access of its proprietary software to third parties, and provides hosting to these parties. Revenue associated with set up and license fees related to our flexible benefits services are deferred and recognized pro rata over the life of the contract.
Benefits and Insurance Services — 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 generally recognized as of the earlier
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 generally recognized when the amounts are determined.
- Life insurance commissions are generally recognized when the amounts are
determined.
- Commission revenue is reported net of sub-broker commissions.
- Contingent commissions are recognized at the earlier of notification or
cash collection.
- Fee income is recognized as in the period earned, and may be based on
actual hours incurred on an hourly fee basis, fixed fee arrangements, or
asset-based fees.
NATIONAL PRACTICES --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; and life insurance commissions are recognized when the policy becomes effective. Commission revenue is reported net of sub-broker commissions. Commission revenue is reported net of reserves for estimated policy cancellations and terminations. This reserve is based upon estimates and assumptions using historical cancellation and termination experience and other current factors to project future experience. CBIZ periodically reviews the adequacy of the reserve and makes adjustments as necessary. The use of different estimates or assumptions could produce different results. |
|
| • | Commissions which are based upon certain performance targets are recognized at the earlier of written notification that the target has been achieved, 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. |
National Practices Services — 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:
- below.
| | |
| • | Mergers & Acquisitions and Capital Advisory — Revenue associated with non-refundable retainers is recognized on a pro rata basis over the life of the engagement. Revenue associated with success fee transactions is recognized when the transaction is completed. |
|
| • | Technology Consulting — Revenue associated with hardware and software sales is recognized upon delivery and acceptance of the product. Revenue associated with installation is recognized as services are performed, and revenue associated with service agreements is recognized on a straight-line basis. Consulting revenue is recognized on an hourly or per diem fee basis as services are performed. |
|
| • | Valuation — Revenue consists primarily of fees for valuation services such as fairness opinions, business plans, litigation support, purchase price allocations and derivative valuations. 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 anyout-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. |
|
| • | Payroll — Revenue is recognized when the actual payroll processing occurs. |
31
| | |
| • | Medical Management Group — Fees for services are primarily based on a percentage of net collections on our clients’ patient accounts receivable. As such, revenue is determinable, earned, and recognized, when payments are received on our clients’ patient accounts. |
Valuation of Accounts Receivable 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.
- 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 Practice Management -- Revenue is recognized when payments are
received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
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 collectabilitycollectibility of our accounts receivable, including unbilled accounts receivable, related to current period service revenue. Management analyzes historical bad debts, client credit-worthiness, the age of accounts receivable and current 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 connection 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,
Valuation of Goodwill
CBIZ adoptedutilizes the non-amortizationpurchase method of accounting for all business combinations in accordance with Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations.” Intangible assets, which include client lists and non-compete agreements, are amortized principally by the straight-line method over their expected period of benefit, not to exceed ten years.
In accordance with the provisions of SFAS 142,
“Goodwill and
accordingly ceased amortization of our remainingOther Intangible Assets”, goodwill
balance.
CBIZ evaluated the goodwillis not amortized. Goodwill is tested for impairment
usingannually during the
new fair value impairment
guidelinesfourth quarter of
SFAS 142. During 2002, CBIZ completed the process of evaluating
our goodwill for impairment using the new fair market impairment guidelines of
SFAS 142. Thiseach year, and between annual tests if an event occurs or circumstances 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.
24
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 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 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 iswould more likely than not readily
determinable, management believes their current fair values approximate their
carrying values as of December 31, 2002. In light of the circumstances noted
above, particularly with respect to the current economic environment, it is
possible thatreduce the fair value of these investments could decline in future
periods, and furthera reporting unit below its carrying value. There was no impairment could occur.
LOSS CONTINGENCIES
of goodwill during the years ended December 31, 2005, 2004, or 2003. 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
Determining the amount of expense to recognize for incentive compensation costsat interim and income tax expenseannual reporting dates involves management judgment. Expenses accrued for incentive compensation are two significant
expense categories thatbased upon expected financial results for the year, and the ultimate determination of incentive compensation can not be made until after year-end results are highly dependent upon management estimates and
judgments, particularly at eachfinalized. Thus, amounts accrued are subject to change in future interim reporting date.periods if actual future financial results are higher or lower than expected. In arriving at the amount of expense to recognize, management believes it makes reasonable estimates and judgments using all significant information available. IncentiveAt December 31, 2005, CBIZ believes that the accrual for incentive compensation costs are accrued onaccurately reflects amounts that will be paid under the plan.
Income Taxes
Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves management judgment. Management estimates an annual effective tax rate (which takes into consideration expected full-year results), which is applied to our quarterly operating results to determine the provision for income tax expense. In the event there is a monthly basis, andsignificant, unusual or infrequent item recognized in our quarterly operating results, the ultimate
determinationtax attributable to that item is made after our year-end results are finalized; thus, estimates
are subject to change.recorded in the interim period in which it occurs. Circumstances that could cause our estimates of effective income tax rates to change include the impact of information that subsequently becamebecomes available as we preparedprepare 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,consultation; the receipt and expected utilization of federal and state income tax credits; and changes mandated as a result of audits by taxing authorities
OTHER SIGNIFICANT POLICIES
authorities. Management believes it makes reasonable judgments using all significant information available when estimating income taxes.
32
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
New Accounting Pronouncements
In July 2002,December 2004, the Financial Accounting Standards Board (FASB) issued the revised Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting123, “Share-Based Payment” (SFAS 123(R)), which addresses the accounting for Costs Associatedshare-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. This statement eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25 and requires instead that such transactions be accounted for using the grant-date fair value based method. In April 2005, the Securities and Exchange Commission (SEC) delayed the effective date for SFAS 123(R) until the first fiscal year beginning after June 15, 2005. As a result of this SEC ruling, CBIZ is required to adopt the provisions of SFAS 123(R) in the first quarter of 2006.
CBIZ expects to adopt the provisions of SFAS 123(R) using the modified prospective method. Pursuant to this method of adoption, prior periods will not be restated. Rather, this method requires that compensation expense be recorded for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date, as the related services are rendered, based on the awards’ grant-date fair value as previously calculated for the pro forma disclosure under SFAS 123. Compensation expense calculated in accordance with Exit or Disposal Activities." The standard requires
companiesSFAS 123(R) in future periods may differ from the pro forma amounts disclosed in Note 1 to recognize costs associated with exit or disposal activities when
they are incurred rather than at the dateconsolidated financial statements included herewith, as the amount of compensation expense will vary depending on assumptions for future forfeitures, the number of options granted in 2006, the market value of our common stock and changes in other variables impacting stock option valuation estimates.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share Based Payments”, which summarizes the views of the SEC regarding the interaction between SFAS 123(R) and certain SEC rules and regulations, and also provides the SEC’s views regarding the valuation of share-based payment arrangements. CBIZ will consider the guidance provided by SAB 107 as it implements SFAS 123(R).
In August 2005, the FASB issued Financial Staff Position (FSP) No. FAS 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under SFAS No. 123(R)”. FSP No. FAS 123(R)-1 states that a commitmentfreestanding financial instrument issued to an exit or disposal
plan.employee originally subject to SFAS 123(R) becomes subject to the recognition and measurement provision of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. The statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002 and itprovisions of FSP No. FAS 123(R)-1 are effective upon CBIZ’s initial adoption of SFAS 123(R). Adoption is not expected to have a significantmaterial impact on ourthe financial position, and results of operations.
operations or cash flows of CBIZ.
In December 2002,February 2006, the FASB issued StatementFSP 123(R)-4, “Classification of Financial Accounting
Standards No. 148, "AccountingOptions and Similar Instruments Issued as Employee Compensation that allow for Stock-Based Compensation -- Transition and
Disclosures," an amendment to SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methodsCash Settlement upon the Occurrence of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148Contingent Event”. FSP 123(R)-4 amends the disclosure requirementscertain provisions of SFAS 123123(R) and addresses the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. The provisions of FSP No. FAS 123(R)-4 are effective upon CBIZ’s initial adoption of SFAS 123(R). Adoption is not expected to require prominent disclosures in both annualhave a material impact on the financial position, results of operations or cash flows of CBIZ.
In May 2005, the FASB issued SFAS No. 154, “Accounting for Changes and
interimError Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 requires retrospective application to prior periods’ financial statements
aboutof changes in accounting principle, unless it is impracticable to determine either the
method of accounting for stock-based employee compensation
andperiod-specific effects or the
cumulative effect of the
method used on reported results. The transition guidance
and annual disclosure provisions arechange. SFAS No. 154 requires that retrospective application of a change in accounting principle be limited to the direct effects of the change; indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS No. 154 is effective for
CBIZ in the
year ended
25
December 31, 2002,first quarter of 2006. In October 2005, the FASB issued FSP No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period”. FSP No. FAS 13-1 clarifies that there is no distinction between the right to use a leased
33
asset during the construction period and after the interim disclosure requirementsconstruction period, and therefore rental costs associated with ground or building operating leases that are incurred during a construction period shall be recognized as rental expense. FSP No. FAS 13-1 is effective for financial reports containing financial statements for interimreporting periods beginning after December 15, 2002.
2005. Adoption is not expected to have a material impact on the financial position, results of operations or cash flows of CBIZ.
In November 2002,2005, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's AccountingFSP FAS 115-1 and Disclosure Requirements for Guarantees, including
Indirect GuaranteesFAS 124-1, “The Meaning of Indebtedness of Others," whichOther-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the disclosuredetermination as to be made by a guarantor in its interimwhen an investment is considered impaired, whether the impairment is other than temporary and annual financial statements about
its obligationsthe measurement of an impairment loss. FSP FAS 115-1 and 124-1 specifically nullifies the requirements of paragraphs 10-18 of EITF 03-1 and references existing other-than-temporary impairment guidance. The guidance under guarantees. FIN 45 requires the recognitionthis FSP is effective for reporting periods beginning after December 15, 2005. The adoption of a liability
by a guarantor at the inception of certain guarantees, specifically recognition
of a liability for the non-contingent component of the guarantee, which is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur, even if itFSP FAS 115-1 and 124-1 is not probable that the payments will be
required under the guarantee or if the guarantee was issued with a premium
payment or as part of a transaction with multiple elements. CBIZ has adopted the
disclosure requirements effective for the year ended December 31, 2002. CBIZ
will apply the initial recognition and measurement provisions effective for all
guarantees issued or modified after December 31, 2002. Other than letters of
credit that are issued in the normal course of business, CBIZ does not enter
into guarantees and therefore does not expect the adoption of FIN 45expected to have a significantmaterial impact on ourthe financial position, and results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidationoperations or cash flows of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities (VIEs) which
have the characteristics of equity investments at risk not sufficient to permit
the entity to finance its activities without additional financial support from
other parties, or VIEs in which the equity investor lacks essential
characteristics of a controlling financial interest. FIN 46 applies to VIEs
created after January 31, 2003 and to VIEs in which an enterprise obtains an
interest after that date. CBIZ will adopt the provisions of FIN 46 in 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Quantitative Information About Market Risk. CBIZ'sCBIZ.
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
CBIZ’s floating rate debt under its credit facility exposes the Company to interest rate risk. Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. A change in the Federal Funds Rate, or the Reference Rate set by the Bank of America, (San
Francisco), would affect the rate at which CBIZ could borrow funds under its credit facility. If market interest rates were to increase or decrease immediately and uniformly by 100 basis points from the levels at December 31, 2002,2005, interest expense would increase or decrease by $0.2approximately $0.3 million annually. CBIZ
has entered into an interest rate swap to minimize the potential impact of
future increases in interest rates. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Interest Rate Risk
Management," for a further discussion of this financial instrument.
CBIZ does not engage in trading market risk sensitive instruments. Except
forCBIZ has used interest rate swaps to manage the interest rate swap discussed above, CBIZ does not purchase instruments,
hedges,mix of its credit facility and related overall cost of borrowing. Interest rate swaps involve the exchange of floating for fixed rate interest payments to effectively convert floating rate debt into fixed rate debt based on a one, three, or "other than trading" instruments that are likely to exposesix-month U.S. dollar LIBOR. Interest rate swaps allow CBIZ to market risk, whether foreign currency exchange, commodity price or equity price
risk. CBIZ has not issued debt instruments, entered into forward or futures
contracts, or purchased options.
Qualitative Information About Market Risk. CBIZ's primary market risk
exposure is thatmaintain a target range of fixed to floating rate debt. Management will continue to evaluate the potential use of interest rate risk. A change in the Federal Funds Rate, or
the reference rate set by the Bank of America (San Francisco), would affect the
rate at which CBIZ could borrow fundsswaps as it deems appropriate under its credit facility. See
"Quantitative Information about Market Risk" for a further discussion on the
potential impact of a change in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
certain operating and market conditions.
| |
| Item 8. | Financial Statements and Supplementary Data |
The Financial Statements and Supplementary Data required hereunder are included in this Annual Report as set forth in Item 15(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
| |
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The | |
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of our disclosure controls and procedures (Disclosure Controls) as of the end of the period covered by this report. 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 appearingrequired to be disclosed by us in the reports that we file or submit under the caption "Proposal No. 1 -- ElectionSecurities Exchange Act of Directors"1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in CBIZ's definitive proxy statement relatingthe 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 the 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
34
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, and 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.
In the course of our ongoing evaluation, we have identified internal control deficiencies in a number of business processes. These deficiencies were not material to our operations or financial reporting either individually or in the aggregate. In each instance, we have undertaken efforts to remediate any deficiencies identified. We are continuing to implement new IT systems where needed to support corporate functions or business unit operations in order to further enhance operating efficiencies. As these new systems and procedures are implemented, we continue to evaluate the effectiveness of our Disclosure Controls and our Internal Controls.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the 2003 Annual
Stockholders Meetinglimitations noted above, the Disclosure Controls are effective in providing reasonable assurance that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is incorporated herein by reference.recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Other than disclosed above, there were no changes in our Internal Controls that occurred during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our Internal Controls.
Item 9B. Other Information
None.
Item 9C. Management’s Report On October 10, 2002, CBIZ announced that Chairman Michael G. DeGroote had
resigned fromInternal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and15d-15(f) under the Company's BoardSecurities Exchange Act of Directors for health reasons, and that
current1934. Under the supervision of management, including our Chief Executive Officer and Director Steven L. Gerard was elected as
ChairmanChief Financial Officer, we conducted an evaluation of our internal control over financial reporting based on the framework provided inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Board. In addition,Treadway Commission (the COSO Framework). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2005.
CBIZ’s independent auditor, KPMG LLP, an independent registered public accounting firm, has issued an audit report on management’s assessment of internal control over financial reporting which appears in Item 8 of this Annual Report.
35
PART III
| |
| Item 10. | Directors and Executive Officers of the Registrant |
Information with respect to fillthis item not included below is incorporated by reference from CBIZ’s Definitive Proxy Statement for the vacancy created by Mr.
DeGroote's resignation,2006 Annual Stockholders’ Meeting to be filed with the BoardSecurities and Exchange Commission no later than 120 days after the end of Directors appointed Mr. DeGroote's son, Mr.
Gary W. DeGroote, to the Board.
CBIZ’s fiscal year.
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:
| | | | | | |
| Name | | Age | | | Position(s) |
| | | | | |
Executive Officers and Directors: | | | | | | |
Steven L. Gerard (1)...................... 57 Gerard(1) | | | 60 | | | Chairman and Chief Executive Officer |
| Rick L. Burdick(1)(3) | | | 54 | | | Director and Vice Chairman |
| Gary W. DeGroote(3) | | | 50 | | | Director |
| Joseph S. DiMartino(3)(4) | | | 62 | | | Director |
| Harve A. Ferrill(2)(3) | | | 73 | | | Director |
| Richard C. Rochon(2)(3)(4) | | | 48 | | | Director |
| Todd Slotkin(3)(4) | | | 53 | | | Director |
| Donald V. Weir(2)(3) | | | 64 | | | Director |
Jerome P. Grisko, Jr.(1)................. 41 | | | 44 | | | President and Chief Operating Officer |
Ware H. Grove (1)......................... 52 | | | 55 | | | Senior Vice President and Chief Financial Officer
Douglas R. Gowland........................ 61 Senior Vice President
|
Leonard Miller............................ 63 Miller | | | 66 | | | Senior Vice President, Accounting, Tax & Advisory |
Robert A. O'Byrne......................... 46 O’Byrne | | | 49 | | | Senior Vice President, Benefits & Insurance |
Michael W. Gleespen....................... 44 Gleespen | | | 47 | | | Secretary and General Counsel
Rick L. Burdick (1)(2)(3)................. 51 Director and Vice Chairman
Gary W. DeGroote.......................... 47 Director
Joseph S. DiMartino (3)................... 59 Director
Harve A. Ferrill (2)(3)................... 70 Director
Richard C. Rochon (2)(4).................. 45 Director
OTHER KEY EMPLOYEES:
|
Other Key Employees: | | | | | | |
George A. Dufour.......................... 57Dufour | | | 59 | | | Senior Vice President and Chief Technology Officer |
Mark M. Waxman............................ 46 Waxman | | | 49 | | | Senior Vice President of Marketing |
Teresa E. Bruce........................... 38 Bruce | | | 41 | | | Vice President, Human Resources |
Chris Spurio.............................. 37 Spurio | | | 40 | | | Vice President, Finance |
| Michael P. Kouzelos | | | 37 | | | Senior Vice President, Strategic Initiatives |
Kelly J. Kuna............................. 33 Kuna | | | 35 | | | Treasurer |
| Robert A. Bosak | | | 38 | | | Controller |
- ---------------
| |
| (1) | Member of Management Executive Committee |
|
| (2) | Member of Audit Committee |
|
| (3) | Member of Nominating & Governance Committee |
|
| (4) | Member of Compensation Committee |
Executive Committee
(2) Member of Audit Committee
(3) Member of Nominating & Governance Committee
(4) Member of Compensation Committee
EXECUTIVE OFFICERS AND DIRECTORS:
Officers and Directors:
Steven L. Gerardwas 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
27
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.positions. 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. Burdickhas served as a Director of CBIZ since October 1997, when he was elected as an outsideindependent director. In October 2002, he was elected by the Board as Vice Chairman, a non-officer position. Mr. Burdick has
36
been a partner at the law firm of Akin Gump Strauss Hauer & Feld L.PLLP since April 1988. Mr. Burdick serves on the Board of Directors of AutoNation, Inc.
Gary W. DeGrootehas served as a Director of CBIZ since October, 2002, when he was elected as an outside 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 ResourcesWaste Services, Inc.
Joseph
Joseph S. DiMartinohas served as a Director of CBIZ since November 1997, when he was elected as an outsideindependent 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.), The Newark Group, and the Muscular Dystrophy Association.
Association, and SunAir Services, Inc.
Harve A. Ferrillhas served as a Director of CBIZ since October 1996, when he was elected as an outsideindependent 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. Rochonhas served as a Director of CBIZ since October 1996, when he was elected as an outsideindependent director. Mr. Rochon is Chairman and Chief Executive Officer of Royal Palm Capital Partners, a private investment and management fund.firm that he founded in March 2002. From 1985 to February 2002 Mr. Rochon served in various capacities with, and most recentlyrecent as President of, Huizenga Holdings, Inc., a management and holding company owned by H. Wayne Huizenga. Mr. Rochon has also served as a director of, and is currently Chairman of, Devcon International a provider of electronic security services since September 1996July 2004. Additionally, Mr. Rochon has been a director of, and as Viceis currently Chairman since April
1997, of, Boca Resorts,SunAir Services, Inc., the ownera provider of pest-control and operatorlawn care services since February 2005. Mr. Rochon has also been a director of luxury resort properties
in South Florida. From 1979 until 1985,Bancshares of Florida, a full-service commercial bank since 2002. In September 2005 Mr. Rochon became Chairman and CEO of Coconut Palm Acquisition Corp., a newly organized blank check company. Mr. Rochon was also employed as a certified public accountant by the public accounting firm of Coopers &and Lybrand L.L.P.from 1979 to 1985. Mr. Rochon alsoreceived his B.S. in accounting from Binghamton University in 1979 and Certified Public Accounting designation in 1981.
Todd Slotkinhas 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 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 Citizens BancsharesTransTech Pharma; formerly served as director of South
Florida.
CalFed Bank; and is Chairman and co-founder of the Food Allergy Initiative.
Donald V. Weirhas 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 five 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
37
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. Grovehas 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
BridgestreetBridgeStreet Accommodations, Inc., which he joined in early 2000 to restructure financing, develop strategic operating alternatives, and assist with merger negotiations. Prior to joining
Bridgestreet,BridgeStreet, Mr. Grove served for
28
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. Douglas R. Gowland has served asIn September, 2004, Mr. Grove was appointed to the Board of Directors for Applica, Inc. (NYSE: APN) and is a Senior Vice President since November
1997. Mr. Gowland served as a Directormember of CBIZ from April 1995 through November
1997. From April 1995 until October 1996, Mr. Gowland served as CBIZ's Executive
Vice President and Chief Operating Officer. From January 1992 to April 1995, Mr.
Gowland served as Vice President -- Hazardous Waste Operations of Republic
Industries, Inc., the predecessor of AutoNation, Inc. 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.
Audit Committee. Leonard Millerhas 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 3840 years of experience, Mr. Miller is a recognized expert in the fields of finance, real estate, general business consulting and various litigation support matters. ProfessionalMr. 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 O’Byrnehas servedserves as a Senior Vice President of CBIZ since December 1998 and is responsible for CBIZ'sCBIZ’s Benefits Administration &and Insurance Services Group.Services. Mr. O'ByrneO’Byrne served as President and Chief Executive Officer of employee benefits brokerage/consulting firms Robert D. O'ByrneO’Byrne and Associates, Inc. and The Grant Nelson Group, Inc. prior to their acquisition by CBIZ in December 1997. Mr. O'ByrneO’Byrne has more than 2425 years of experience in the insurance and benefits consulting field.
Michael W. Gleespenhas served as Corporate Secretary and General Counsel
since JuneApril 2001 and General Counsel since June 2001. Mr. Gleespen is an attorney and has served as CBIZ'sCBIZ’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 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.
OTHER KEY EMPLOYEES:
Other Key Employees:
George A. Dufourwas 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 a member of the northeast Ohio chapter of the HealthcareSociety for Information Management Systems Society.
(SIM). Mr. Dufour earned his MBA from Baldwin Wallace College.
Mark M. Waxmanhas over
twentytwenty-five years experience in marketing and branding. Prior to joining CBIZ, he was CEO/Creative Director of one of Silicon
Valley'sValley’s most well-known advertising agencies, Carter Waxman.
29
Most recently, he was a founding partner of SK Consulting (acquired by 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. 38
Teresa E. Brucehas 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'ByrneO’Byrne & Associates, Inc. and The Grant Nelson Group, Inc., subsidiaries of CBIZ now known as CBIZ Benefits and Insurance Services, Inc. Ms. Bruce has over 1519 years of experience in human resources and is an active member of the Greater Kansas City Chapter of The Human Resources Management Association and Society of Human Resources Management.
Management, and is certified as a Senior Professional in Human Resources (SPHR).
Chris Spuriohas 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. Kouzelosjoined CBIZ in June 1998 and was appointed Senior Vice President of Strategic Initiatives in September 2005. Mr. Kouzelos served as Vice President of Strategic Initiatives from April 2001 through August 2005, as Vice President of Shared Services from August 2000 to March 2001, and as 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 Business Administration from The Ohio State University in May of 1998. Mr. Kouzelos is a CPA and a member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.
Kelly J. Kuna hasjoined CBIZ in December 1998 and was appointed Corporate Treasurer in April 2005. Ms. Kuna served as Corporate Controller sincefrom July 1999. Mrs. Kuna
served1999 through March 2005, and as Manager of External Reporting from December 1998 to June 1999. Prior to joining CBIZ, Mrs.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. Mrs.Ms. Kuna is a CPA and a member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.
ITEM 11. EXECUTIVE COMPENSATION
Robert A. Bosakjoined CBIZ in September 2001 and has served as Corporate Controller since April 2005. Prior to joining CBIZ, Mr. Bosak was associated with BridgeStreet Accommodations from February 1998 through June 2001, where he served as Corporate Controller and Director of Financial Operations. Prior to joining BridgeStreet Accommodations, Mr. Bosak was Corporate Controller of the Rock and Roll Hall of Fame and Museum, from June 1993 through February 1998. Mr. Bosak also worked in the public accounting industry with two Cleveland based firms from 1987 to 1993. Mr. Bosak is a CPA and a member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.
| |
| Item 11. | Executive Compensation |
Information with respect to this item is incorporated by reference from the discussion under the heading "Executive Compensation"“Executive Compensation” in CBIZ's definitive proxy
statementCBIZ’s Definitive Proxy Statement for the 20032006 Annual Stockholders'Stockholders’ Meeting to be filed with the Securities and Exchange Commission no later than 120 days after the end of CBIZ'sCBIZ’s fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information with respect to this item is incorporated by reference from CBIZ's definitive proxy statementCBIZ’s Definitive Proxy Statement for the 20032006 Annual Stockholders'Stockholders’ Meeting to be filed with the Securities and Exchange Commission no later than 120 days after the end of CBIZ'sCBIZ’s fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
| |
| Item 13. | Certain Relationships and Related Transactions |
The following is a summary of certain agreements and transactions between or among CBIZ and certain related parties. It is CBIZ'sCBIZ’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'sCBIZ’s experience and the terms of its transactions with unaffiliated parties, it is the Audit Committee of the Board of Directors'Directors’ and managements’ belief that the transactions described below met these standards at the time of the transactions.
A number of the businesses acquired since October 1996by CBIZ are located in properties owned indirectly by and leased from persons employed by CBIZ. In the aggregate, CBIZ paid approximately $0.8$1.3 million, $1.5$1.3 million, and $1.5$1.4 million for the years ended 2002, 20012005, 2004 and 2000,2003, respectively, under such leases which management believes were at market rates.
39
Rick L. Burdick, a director of CBIZ, is a partner of Akin Gump Strauss Hauer & Feld, LLP
(Akin, Gump). Akin, Gump performed legal work for CBIZ during
2002, 20012005, 2004 and
20002003 for which the firm received
$119,064, $68,540approximately $0.1 million, $0.2 million, and
$116,000$0.2 million from CBIZ, respectively.
CBIZ and/or its subsidiaries maintain joint-referral relationships and
service agreements with licensed CPA firms under which CBIZ subsidiaries provide
administrative services (including office, bookkeeping, accounting, and other
administrative services, preparing marketing and promotion materials, and
leasing of administrative and
30
professional staff) in exchange for a fee. The majority of the partners in the
independent CPA firms maintaining administrative service agreements with CBIZ
are CBIZ employees.
Robert A. O'Byrne,O’Byrne, a Senior Vice President, Benefits & Insurance, was
indebted to CBIZ in the amount of $250,000 at December 31, 2002 and $325,000 at
December 31, 2001. Likewise, CBIZ was indebted to the former shareholders of
RDOB/GNG, of which Mr. O'Byrne is a shareholder, for $420,000 at December 31,
2002. 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 bothwas in existence at the time CBIZ acquired the former company, of which Mr. O'ByrneO’Byrne was an owner. The partnership received approximately $0.3 million, $0.3 million, and $0.4 million from CBIZ during the years ended December 31, 2005, 2004 and 2003, respectively.
CBIZ maintains joint-referral relationships and administrative service agreements with independent licensed CPA firms under which CBIZ provides administrative services in exchange for a fee. These firms are owned by licensed CPAs who are employed by CBIZ subsidiaries, and provide audit and attest services to clients including CBIZ’s clients. The CPA firms with which CBIZ maintains service agreements operate as limited liability companies, limited liability partnerships or professional corporations. The firms are separate legal entities with separate governing bodies and officers. CBIZ has divested several operations during 2002,no ownership interest in any of these CPA firms, and neither the existence of the administrative service agreements 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 each of its respective services, and CBIZ does not believe that its arrangements with these CPA firms result in additional risk of loss.
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”, as amended. The impact to CBIZ of this accounting pronouncement is discussed in Note 1 to CBIZ’s consolidated financial statements included herewith.
CBIZ acted as guarantor on three letters of credit for a CPA firm with which it has an affiliation. The letters of credit total $2.4 million and $1.3 million as of December 31, 2005, and December 31, 2004, respectively. In accordance with FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and its amendments, CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees, which is recorded as other current liabilities in the accompanying consolidated financial statements. Management does not expect any material changes to result from these instruments as performance is not expected to be required.
In 2003, CBIZ executed a note receivable with a CPA firm whose partner group has since joined MHM P.C., a CPA firm with which CBIZ maintains an administrative services agreement. The balance on the note at December 31, 2005 and 2004 was approximately $0.1 million and $0.2 million, respectively.
In an effort to rationalize the business, and sharpenCBIZ has divested of several operations that were underperforming, located in secondary markets or did not provide the focus on non-strategic businesses.level of synergistic cross-serving opportunities with other CBIZ businesses that is desired. In accordance with this strategy, CBIZ has sold and may sell in the future businesses to former employees or shareholders. Management believes thesethat past transactions were priced at market rates, competitively bid, and entered into at arm'sarm’s length terms and conditions. See note 17
| |
| Item 14. | Principal Accounting Fees and Services |
Information with respect to CBIZ's consolidated financial
statements included herewith.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer have evaluatedthis item is incorporated by reference from CBIZ’s Definitive Proxy Statement for the disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as of a date within 90 days before the filing date of this
annual report. Based on this evaluation they concluded that the disclosure
controls and procedures effectively ensure that information required2006 Annual Stockholders’ Meeting to be disclosed in our filings and submissions under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified infiled with the Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS
There have beenCommission no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent tolater than 120 days after the evaluationend of the internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CBIZ’s fiscal year.
40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
| |
| Item 15. | Exhibits, Financial Statement Schedules |
(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.
31
EXHIBIT NO. DESCRIPTION
- ----------- -----------
| |
| 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. Since its incorporation, CBIZ has operated under various names including: Republic Environmental Systems, Inc.; International Alliance Services, Inc.; Century Business Services, Inc.; and CBIZ, Inc. Exhibits listed below refer to these names collectively as “the Company”. |
| | |
| Exhibit No. | | Description |
| | |
| 3.1 | | Amended and Restated Certificate of Incorporation of CBIZthe Company (filed as Exhibit 3.1 to CBIZ'sthe Company’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 CBIZthe Company dated October 18,17, 1996 (filed as Exhibit 3.2 to CBIZ'sthe Company’s Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference). |
| 3.3 | | Certificate of Amendment ofto the Certificate of Incorporation of CBIZthe Company effective December 23, 199723,1997 (filed as Exhibit 3.3 to CBIZ'sthe Company’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 CBIZthe Company dated September 10, 1998 (filed as Exhibit 3.4 to CBIZ'sthe Company’s Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
3.5 |
| 3.5* | | Certificate of Amendment of the Certificate of Incorporation of the Company, effective August 1, 2005. |
| 3.6 | | Amended and Restated Bylaws of CBIZthe Company (filed as Exhibit 3.2 to CBIZ'sthe Company’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 CBIZthe Company (filed as Exhibit 4.1 to CBIZ'sthe Company’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'sthe Company’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 | | 2002 Stock OptionIncentive Plan (filed as Appendix IA to CBIZ'sthe Company’s Proxy Statement 1997for the 2002 Annual Meeting of Stockholders dated April 1, 19972002 and incorporated herein by reference).
10.3 Amendment |
| 10.2 | | Severance Protection Agreement by and between the Company and Jerome P. Grisko, Jr. (filed as exhibit 10.11 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).
10.4 Amendment to the 1996 Employee Stock Option Plan (filed on
Secretary's Certificate as Exhibit 10.10 to CBIZ's AnnualCompany’s Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference).
10.5 Severance Protection |
| 10.3 | | Employment Agreement by and between Century
Business Services, Inc.the Company and Jerome P. Grisko, Jr.Steven L. Gerard (filed as exhibit 10.1110.13 to CBIZ'sthe Company’s Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference).
10.6 Severance Protection |
| 10.4 | | Employment Agreement by and between Century
Business Services, Inc.the Company and Charles D. Hamm, Jr.Ware H. Grove (filed as exhibit 10.1210.14 to CBIZ'sthe Company’s Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference).
10.7 Employment |
| 10.5 | | Amended and Restated Credit Agreement bydated as of August 6, 2004, among the Company, Bank of America, N.A., as Agent, a Lender, Issuing Bank and between Century Business
Services, Inc.Swing Line Bank, and Steven L. Gerard.The Other Financial Institutions Party Hereto (filed as exhibit 10.1310.12 to CBIZ'sthe Company’s Report on Form 10-K for the year ended December 31, 2000,2004, and incorporated herein by reference).
10.8 Employment |
41
| | |
| Exhibit No. | | Description |
| | |
| 10.6 | | Amendment No. 1 to Amended and Restated Credit Agreement byeffective March 31, 2005 among the Company and between Century Business
Services, Inc. and Ware H. Grove.each of the Guarantors (filed as exhibit 10.1410.13 to CBIZ's Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
10.9 Note and Warrant Purchase agreement by and between
HarborView Partners, LLC, and Century Business Services,
Inc, dated September 26, 2001 (filed as exhibit 10.16 to
CBIZ's Report on Form 10-K for the year ended December 31,
2001, 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'sCompany’s Report on Form 10-Q for the period ended September 30, 2002,March 31, 2005, and incorporated herein by reference). |
| 10.7 | | Credit Agreement dated as of February 13, 2006 Among the Company, Bank of America, N.A., as Agent, a Lender, Issuing Bank and Swing Line Bank, and The Other Financial Institutions Party Hereto Banc of America Securities, LLC as Sole Lead Arranger and Book Manager (filed as exhibit 10.14 to the Company’s Current Report on Form 8-K dated February 13, 2006, and filed February 17, 2006, and incorporated herein by reference). |
| 21.1* | | List of Subsidiaries of Century Business Services,CBIZ, Inc. |
| 23* | | Consent of KPMG LLP
LLP. |
| 24* | | Powers of attorney (included on the signature page hereto). |
32
EXHIBIT NO. DESCRIPTION
- ----------- -----------
99.1* | 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
99.2* 2002. |
| 32.2* | | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2002. |
- ---------------
* Indicates documents filed herewith.
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed during the three months
ended December 31, 2002:
(a) On October 10, 2002, CBIZ filed a Form 8-K announcing that Chairman
Michael G. DeGroote had resigned from CBIZ's Board of Directors for
health reasons, and that current Chief Executive Officer and Director
Steven L. Gerard had been elected as Chairman of the Board, and that
Mr. DeGroote's son, Mr. Gary W. DeGroote, was appointed to the Board to
fill the vacancy created by Mr. DeGroote's resignation.
33
| |
| * | Indicates documents filed herewith. |
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CenturyCBIZ, Inc. 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 24,
2003
| |
| |
| Ware H. Grove |
| Chief Financial Officer |
| March 15, 2006 |
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-factattorney-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,CBIZ, 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-factattorney-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-factattorney-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,CBIZ, Inc. and in the capacities and on the date indicated above.
/s/ STEVEN L. GERARD /s/ JOSEPH S. DIMARTINO
- -------------------------------------------- --------------------------------------------
| | |
/s/Steven L. Gerard Joseph S. DiMartino
Steven L. Gerard
Chairman and Chief Executive Officer | | /s/Joseph S. DiMartino
Joseph S. DiMartino
Director
/s/ WARE H. GROVE /s/ HARVE A. FERRILL
- -------------------------------------------- --------------------------------------------
|
| | |
/s/Ware H. Grove
Ware H. Grove
Chief Financial Officer
(Principal Financial and Accounting Officer) | | /s/Harve A. Ferrill
Chief Financial Officer (Principal Financial
Harve A. Ferrill
Director
and Accounting Officer)
/s/ GARY W. DEGROOTE /s/ RICHARD C. ROCHON
- -------------------------------------------- --------------------------------------------
|
| | |
/s/Gary W. DeGroote
Gary W. DeGroote
Director | | /s/Richard C. Rochon
Richard C. Rochon
Director Director
/s/ RICK L. BURDICK
- --------------------------------------------
|
| | |
/s/Rick L. Burdick
Rick L. Burdick
Director | | /s/Todd Slotkin
Todd Slotkin
Director |
| | |
/s/Donald V. Weir
Donald V. Weir
Director | | |
34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
43
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES | | | | |
| | Page | |
| | | |
CBIZ, Inc. and Subsidiaries | | | | |
Report of Independent Auditors' Registered Public Accounting Firm On Internal Control Over Financial Reporting | | | F-2 | |
Report ............................. F-2
of Independent Registered Public Accounting Firm | | | F-3 | |
Consolidated Balance Sheets as of December 31, 20022005 and 2001................................................... F-3
2004 | | | F-4 | |
Consolidated Statements of Operations for the years ended December 31, 2002, 20012005, 2004 and 2000 ...................... F-4
2003 | | | F-5 | |
Consolidated Statements of Stockholders'Stockholders’ Equity for the years ended December 31, 2002, 20012005, 2004 and 2000........... F-5
2003 | | | F-6 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 20012005, 2004 and 2000....................... F-6
2003 | | | F-7 | |
Notes to the Consolidated Financial Statements............ F-7
Statements | | | F-8 | |
Schedule II --— Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2002, 20012005, 2004 and 2000............................................... F-30
Certification of Principal Executive Officer.............. F-31
Certification of Principal Financial Officer.............. F-32
2003 | | | F-39 | |
F-1
REPORT OF INDEPENDENT AUDITORS' REPORT
REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Century Business Services,
CBIZ, Inc.:
We have audited management’s assessment, Management’s Report On Internal Control Over Financial Reporting, included in Item 9C of Form 10-K, that CBIZ, Inc. and subsidiaries (Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CBIZ, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 15, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Cleveland, Ohio
March 15, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CBIZ, Inc.:
We have audited the consolidated financial statements of Century Business
Services,CBIZ, Inc. and Subsidiariessubsidiaries (Company) as listed in the accompanying index on page F-1. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule as listed in the accompanying index on page F-1. These consolidated financial statements and financial statement schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States of America.Public Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all material respects, the financial position of Century
Business Services,CBIZ, Inc. and Subsidiariessubsidiaries as of December 31, 20022005 and 2001,2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002,2005, in conformity with accounting
principlesU.S. generally accepted in the United States of America.accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed
We also have audited, in note 1 note 18 toaccordance with the consolidatedstandards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial statements,reporting as of December 31, 2005, based on criteria established inInternal Control — Integrated Frameworkissued by the Company adopted SecuritiesCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and Exchange Commission Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements,"our report dated March 15, 2006 expressed an unqualified opinion on management’s assessment of, and changed certain
revenue recognition policiesthe effective January 1, 2000.
As discussed in notes 1 and 6 to the consolidatedoperation of, internal control over financial statements, the
Company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards 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 and 21 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/reporting.
/s/ KPMG LLP
Cleveland, Ohio
February 7, 2003
F-2
CENTURY BUSINESS SERVICES,March 15, 2006
F-3
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 20022005 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001
--------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,351 $ 4,340
Restricted cash........................................... 16,980 13,403
Accounts receivable, net.................................. 102,982 112,666
Notes receivable -- current............................... 2,029 2,260
Income taxes recoverable.................................. 4,957 2,798
Deferred income taxes..................................... 3,567 6,013
Other current assets...................................... 7,098 10,320
Assets of businesses held for sale........................ 9,566 20,491
--------- --------
Current assets before funds held for clients...... 153,530 172,291
Funds held for clients...................................... 49,217 41,049
--------- --------
Total current assets.............................. 202,747 213,340
Property and equipment, net................................. 44,600 52,945
Notes receivable -- non-current............................. 7,585 5,000
Deferred income taxes -- non-current........................ 10,580 3,540
Goodwill and other intangible assets, net................... 163,706 247,065
Other assets................................................ 3,893 6,459
--------- --------
Total assets...................................... $ 433,111 $528,349
========= ========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 22,548 $ 21,745
Other current liabilities................................. 37,687 32,378
Liabilities of businesses held for sale................... 6,905 4,596
--------- --------
Current liabilities before client fund deposits... 67,140 58,719
Client fund obligations................................... 49,217 41,049
--------- --------
Total current liabilities......................... 116,357 99,768
Bank debt................................................... 17,500 55,000
Other non-current liabilities............................... 4,936 2,934
--------- --------
Total liabilities................................. 138,793 157,702
--------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Shares authorized 250,000; Shares issued and
outstanding 95,121 and 94,879......................... 951 949
Additional paid-in capital.................................. 439,684 439,136
Accumulated deficit......................................... (144,754) (67,906)
Treasury stock.............................................. (1,308) (1,308)
Accumulated other comprehensive loss........................ (255) (224)
--------- --------
Total stockholders' equity........................ 294,318 370,647
Commitments and contingencies
--------- --------
Total liabilities and stockholders' equity........ $ 433,111 $528,349
========= ========
2004 (In thousands)
| | | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| ASSETS |
| Current assets: | | | | | | | | |
| | Cash and cash equivalents | | $ | 8,909 | | | $ | 5,291 | |
| | Restricted cash | | | 9,873 | | | | 10,089 | |
| | Accounts receivable, net | | | 99,185 | | | | 99,021 | |
| | Notes receivable — current | | | 6,042 | | | | 1,377 | |
| | Income taxes recoverable | | | — | | | | 7,146 | |
| | Deferred income taxes — current | | | 3,241 | | | | 3,743 | |
| | Other current assets | | | 9,504 | | | | 7,964 | |
| | Assets of discontinued operations | | | 6,730 | | | | 18,305 | |
| | | | | | | |
| | | Current assets before funds held for clients | | | 143,484 | | | | 152,936 | |
| Funds held for clients | | | 65,669 | | | | 32,787 | |
| | | | | | | |
| | | Total current assets | | | 209,153 | | | | 185,723 | |
| Property and equipment, net | | | 33,486 | | | | 36,023 | |
| Notes receivable — non-current | | | 3,575 | | | | 4,726 | |
| Deferred income taxes — non-current | | | 9,193 | | | | 7,200 | |
| Goodwill and other intangible assets, net | | | 185,535 | | | | 172,644 | |
| Assets of deferred compensation plan | | | 9,803 | | | | 4,285 | |
| Other assets | | | 3,833 | | | | 3,514 | |
| | | | | | | |
| | | Total assets | | $ | 454,578 | | | $ | 414,115 | |
| | | | | | | |
| |
| LIABILITIES |
| Current liabilities: | | | | | | | | |
| | Accounts payable | | $ | 26,436 | | | $ | 24,918 | |
| | Income taxes payable | | | 1,115 | | | | — | |
| | Accrued personnel costs | | | 35,937 | | | | 24,322 | |
| | Other current liabilities | | | 18,332 | | | | 16,269 | |
| | Liabilities of discontinued operations | | | 5,939 | | | | 8,146 | |
| | | | | | | |
| | | Current liabilities before client fund obligations | | | 87,759 | | | | 73,655 | |
| | Client fund obligations | | | 65,669 | | | | 32,787 | |
| | | | | | | |
| | | Total current liabilities | | | 153,428 | | | | 106,442 | |
| Bank debt | | | 32,200 | | | | 53,900 | |
| Deferred compensation plan obligations | | | 9,803 | | | | 4,285 | |
| Other non-current liabilities | | | 4,486 | | | | 2,991 | |
| | | | | | | |
| | | Total liabilities | | | 199,917 | | | | 167,618 | |
| | | | | | | |
| STOCKHOLDERS’ EQUITY |
| Common stock, par value $0.01 per share; Shares authorized 250,000; Shares issued 98,381 and 96,407; Shares outstanding 73,822 and 75,651 | | | 984 | | | | 964 | |
| Additional paid-in capital | | | 450,734 | | | | 444,584 | |
| Accumulated deficit | | | (94,714 | ) | | | (113,387 | ) |
| Treasury stock, 24,559 and 20,756 shares | | | (102,317 | ) | | | (85,650 | ) |
| Accumulated other comprehensive loss | | | (26 | ) | | | (14 | ) |
| | | | | | | |
| | | Total stockholders’ equity | | | 254,661 | | | | 246,497 | |
| | | | | | | |
| | | Total liabilities and stockholders’ equity | | $ | 454,578 | | | $ | 414,115 | |
| | | | | | | |
See the accompanying notes to the consolidated financial statements.
F-3
CENTURY BUSINESS SERVICES,F-4
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER
Years Ended December 31, 2002, 20012005, 2004 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 2000
-------- -------- ---------
Revenue..................................................... $504,335 $516,892 $ 551,171
Operating expenses.......................................... 445,666 447,513 490,581
-------- -------- ---------
Gross margin................................................ 58,669 69,379 60,590
Corporate general and administrative........................ 19,672 19,797 24,694
Depreciation and amortization............................... 20,657 40,636 43,339
-------- -------- ---------
Operating income (loss)..................................... 18,340 8,946 (7,443)
-------- -------- ---------
Other income (expense):
Interest expense.......................................... (2,478) (6,797) (12,113)
Goodwill impairment....................................... -- -- (32,953)
Gain (loss) on divested operations, net................... 930 (7,113) (31,576)
Other income (expense), net............................... (1,112) 3,939 (5,834)
-------- -------- ---------
Total other expense, net.......................... (2,660) (9,971) (82,476)
Income (loss) from continuing operations before income tax
expense................................................... 15,680 (1,025) (89,919)
Income tax expense.......................................... 8,124 12,192 1,514
-------- -------- ---------
Income (loss) from continuing operations.................... 7,556 (13,217) (91,433)
Loss from operations of discontinued businesses, net of
income tax expense (benefit) of $367, ($1,855) and
($6,154), respectively.................................... (1,926) (2,783) (17,041)
Loss on disposal of discontinued businesses, net of income
tax benefit of $1,413, $0 and $3,002, respectively........ (2,471) -- (5,697)
-------- -------- ---------
Income (loss) before cumulative effect of change in
accounting principles..................................... 3,159 (16,000) (114,171)
Cumulative effect of change in accounting principles, net of
income tax benefit of $8,584, $0 and $7,936,
respectively.............................................. (80,007) -- (11,905)
-------- -------- ---------
Net loss.................................................... $(76,848) $(16,000) $(126,076)
======== ======== =========
Earnings (loss) per share:
Basic:
Continuing operations.................................. $ 0.08 $ (0.14) $ (0.96)
Discontinued operations................................ (0.05) (0.03) (0.24)
Cumulative effect of change in accounting principles... (0.84) -- (0.13)
-------- -------- ---------
Net loss............................................... $ (0.81) $ (0.17) $ (1.33)
======== ======== =========
Diluted:
Continuing operations.................................. $ 0.08 $ (0.14) $ (0.96)
Discontinued operations................................ (0.05) (0.03) (0.24)
Cumulative effect of change in accounting principles... (0.82) -- (0.13)
-------- -------- ---------
Net loss............................................... $ (0.79) $ (0.17) $ (1.33)
======== ======== =========
Weighted-average common shares outstanding:
Basic.................................................. 94,810 94,818 94,674
======== ======== =========
Diluted................................................ 96,992 94,818 94,674
======== ======== =========
2003 (In thousands, except per share data)
| | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Revenue | | $ | 559,269 | | | $ | 504,898 | | | $ | 482,254 | |
| Operating expenses | | | 485,295 | | | | 438,417 | | | | 419,932 | |
| | | | | | | | | | |
| Gross margin | | | 73,974 | | | | 66,481 | | | | 62,322 | |
| Corporate general and administrative expense | | | 24,911 | | | | 24,099 | | | | 18,745 | |
| Depreciation and amortization expense | | | 15,163 | | | | 16,010 | | | | 16,581 | |
| | | | | | | | | | |
| Operating income | | | 33,900 | | | | 26,372 | | | | 26,996 | |
| Other income (expense): | | | | | | | | | | | | |
| | Interest expense | | | (3,109 | ) | | | (1,507 | ) | | | (1,055 | ) |
| | Gain on sale of operations, net | | | 314 | | | | 996 | | | | 2,519 | |
| | Other income (expense), net | | | 5,052 | | | | 3,532 | | | | (1,227 | ) |
| | | | | | | | | | |
| | | Total other income, net | | | 2,257 | | | | 3,021 | | | | 237 | |
| Income from continuing operations before income tax expense | | | 36,157 | | | | 29,393 | | | | 27,233 | |
| Income tax expense | | | 14,571 | | | | 8,045 | | | | 11,918 | |
| | | | | | | | | | |
| Income from continuing operations | | | 21,586 | | | | 21,348 | | | | 15,315 | |
| Loss from operations of discontinued operations, net of tax | | | (6,463 | ) | | | (5,429 | ) | | | (725 | ) |
| Gain on disposal of discontinued operations, net of tax | | | 3,550 | | | | 132 | | | | 726 | |
| | | | | | | | | | |
| Net income | | $ | 18,673 | | | $ | 16,051 | | | $ | 15,316 | |
| | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | | | |
| | Basic: | | | | | | | | | | | | |
| | | Continuing operations | | $ | 0.29 | | | $ | 0.27 | | | $ | 0.17 | |
| | | Discontinued operations | | | (0.04 | ) | | | (0.07 | ) | | | — | |
| | | | | | | | | | |
| | | Net income | | $ | 0.25 | | | $ | 0.20 | | | $ | 0.17 | |
| | | | | | | | | | |
| | Diluted: | | | | | | | | | | | | |
| | | Continuing operations | | $ | 0.28 | | | $ | 0.26 | | | $ | 0.17 | |
| | | Discontinued operations | | | (0.04 | ) | | | (0.06 | ) | | | — | |
| | | | | | | | | | |
| | | Net income | | $ | 0.24 | | | $ | 0.20 | | | $ | 0.17 | |
| | | | | | | | | | |
| Basic weighted average common shares outstanding | | | 74,448 | | | | 79,217 | | | | 90,400 | |
| | | | | | | | | | |
| Diluted weighted average common shares outstanding | | | 76,827 | | | | 81,477 | | | | 92,762 | |
| | | | | | | | | | |
See the accompanying notes to the consolidated financial statements.
F-4
CENTURY BUSINESS SERVICES,F-5
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER
Years Ended December 31, 2002, 20012005, 2004 AND 2000
(IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS UNEARNED OTHER
COMMON PAID-IN (ACCUM. ESOP TREASURY COMPREHENSIVE
SHARES STOCK CAPITAL DEFICIT) SHARES STOCK INCOME (LOSS) TOTALS
------ ------ ---------- --------- -------- -------- ------------- ---------
December 31, 1999........... 93,341 $933 $443,052 $ 74,170 $(1,795) $ (754) $(2,474) $ 513,132
Comprehensive loss:
Net loss................ -- -- -- (126,076) -- -- -- (126,076)
Change in unrealized
appreciation, net
of tax............. -- -- -- -- -- -- 2,444 2,444
------ ---- -------- --------- ------- ------- ------- ---------
Total comprehensive
loss............. -- -- -- (126,076) -- -- 2,444 (123,632)
Allocation of ESOP........ -- -- (1,795) -- 1,795 -- -- --
Warrants.................. 56 1 157 -- -- -- -- 158
Business acquisitions and
contingent payments..... 1,300 13 (2,733) -- -- -- -- (2,720)
------ ---- -------- --------- ------- ------- ------- ---------
December 31, 2000........... 94,697 947 438,681 (51,906) -- (754) (30) 386,938
Comprehensive loss:
Net loss................ -- -- -- (16,000) -- -- -- (16,000)
Change in unrealized
appreciation, net
of tax............. -- -- -- -- -- -- (194) (194)
------ ---- -------- --------- ------- ------- ------- ---------
Total comprehensive
loss............. -- -- -- (16,000) -- -- (194) (16,194)
------ ---- -------- --------- ------- ------- ------- ---------
Share repurchase........ -- -- -- -- -- (439) -- (439)
Divestiture
consideration......... -- -- -- -- -- (115) -- (115)
Stock options........... 34 -- 144 -- -- -- -- 144
Business acquisitions
and contingent
payments.............. 148 2 311 -- -- -- -- 313
------ ---- -------- --------- ------- ------- ------- ---------
December 31, 2001........... 94,879 949 439,136 (67,906) -- (1,308) (224) 370,647
Comprehensive loss:
Net loss................ -- -- -- (76,848) -- -- -- (76,848)
Change in unrealized
appreciation, net
of tax............. -- -- -- -- -- -- (31) (31)
------ ---- -------- --------- ------- ------- ------- ---------
Total comprehensive
loss............. -- -- -- (76,848) -- -- (31) (76,879)
------ ---- -------- --------- ------- ------- ------- ---------
Stock options......... 242 2 548 -- -- -- -- 550
------ ---- -------- --------- ------- ------- ------- ---------
December 31, 2002........... 95,121 $951 $439,684 $(144,754) $ -- $(1,308) $ (255) $ 294,318
====== ==== ======== ========= ======= ======= ======= =========
2003 (In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | |
| | | Issued | | | | | Additional | | | | | | | | | Other | | | |
| | | Common | | | Common | | | Paid-In | | | Accumulated | | | Treasury | | | Treasury | | | Comprehensive | | | |
| | | Shares | | | Stock | | | Capital | | | Deficit | | | Shares | | | Stock | | | Loss | | | Totals | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2002 | | | 95,121 | | | $ | 951 | | | $ | 439,684 | | | $ | (144,754 | ) | | | 220 | | | $ | (1,308 | ) | | $ | (255 | ) | | $ | 294,318 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net income | | | — | | | | — | | | | — | | | | 15,316 | | | | — | | | | — | | | | — | | | | 15,316 | |
| | Change in unrealized appreciation, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | 254 | | | | 254 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,570 | |
| Share repurchases | | | — | | | | — | | | | — | | | | — | | | | 10,036 | | | | (33,578 | ) | | | — | | | | (33,578 | ) |
| Divestiture consideration | | | — | | | | — | | | | — | | | | — | | | | 46 | | | | (201 | ) | | | — | | | | (201 | ) |
| Stock options | | | 375 | | | | 4 | | | | 1,203 | | | | — | | | | — | | | | — | | | | — | | | | 1,207 | |
| Business acquisitions and contingent payments | | | 177 | | | | 2 | | | | 520 | | | | — | | | | — | | | | — | | | | — | | | | 522 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2003 | | | 95,673 | | | $ | 957 | | | $ | 441,407 | | | $ | (129,438 | ) | | | 10,302 | | | $ | (35,087 | ) | | $ | (1 | ) | | $ | 277,838 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net income | | | — | | | | — | | | | — | | | | 16,051 | | | | — | | | | — | | | | — | | | | 16,051 | |
| | Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | (13 | ) | | | (13 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16,038 | |
| Share repurchases | | | — | | | | — | | | | — | | | | — | | | | 10,424 | | | | (50,419 | ) | | | — | | | | (50,419 | ) |
| Restricted stock | | | — | | | | — | | | | 518 | | | | — | | | | — | | | | — | | | | — | | | | 518 | |
| Divestiture consideration | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | (144 | ) | | | — | | | | (144 | ) |
| Stock options | | | 519 | | | | 5 | | | | 1,696 | | | | — | | | | — | | | | — | | | | — | | | | 1,701 | |
| Business acquisitions and contingent payments | | | 215 | | | | 2 | | | | 963 | | | | — | | | | — | | | | — | | | | — | | | | 965 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2004 | | | 96,407 | | | $ | 964 | | | $ | 444,584 | | | $ | (113,387 | ) | | | 20,756 | | | $ | (85,650 | ) | | $ | (14 | ) | | $ | 246,497 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net income | | | — | | | | — | | | | — | | | | 18,673 | | | | — | | | | — | | | | — | | | | 18,673 | |
| | Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | (12 | ) | | | (12 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18,661 | |
| Share repurchases | | | — | | | | — | | | | — | | | | — | | | | 3,803 | | | | (16,667 | ) | | | — | | | | (16,667 | ) |
| Restricted stock | | | 247 | | | | 2 | | | | 453 | | | | — | | | | — | | | | — | | | | — | | | | 455 | |
| Stock options | | | 1,658 | | | | 17 | | | | 5,401 | | | | — | | | | — | | | | — | | | | — | | | | 5,418 | |
| Business acquisitions and contingent payments | | | 69 | | | | 1 | | | | 296 | | | | — | | | | — | | | | — | | | | — | | | | 297 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2005 | | | 98,381 | | | $ | 984 | | | $ | 450,734 | | | $ | (94,714 | ) | | | 24,559 | | | $ | (102,317 | ) | | $ | (26 | ) | | $ | 254,661 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See the accompanying notes to the consolidated financial statements.
F-5
CENTURY BUSINESS SERVICES,F-6
CBIZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER
Years Ended December 31, 2002, 20012005, 2004 AND 2000
(IN THOUSANDS)
2002 2001 2000
--------- -------- ---------
Cash flows from operating activities:
Net loss.................................................. $ (76,848) $(16,000) $(126,076)
Adjustments to reconcile net loss to cash provided by
operating activities:
Goodwill impairment.................................... -- -- 32,953
Loss from discontinued operations...................... 1,926 2,783 17,041
Loss on divestiture of discontinued operations......... 2,471 -- 5,697
(Gain) loss on divested operations..................... (930) 7,113 31,576
Bad debt expense, net of recoveries.................... 7,201 8,059 21,887
Accounts receivable reduction due to change in
accounting principle................................. -- -- 19,209
Cumulative effect of change in accounting principle.... 80,007 -- 11,905
Depreciation and amortization.......................... 20,657 40,636 43,339
Deferred income taxes.................................. (3,694) (1,487) (1,204)
Changes in assets and liabilities, net of acquisitions and
dispositions:
Restricted cash........................................ (3,668) 3,912 1,041
Accounts receivable, net............................... 1,237 2,395 (20,708)
Other assets........................................... 1,548 2,935 (2,354)
Accounts payable....................................... 726 (10,311) (7,040)
Income taxes........................................... 7,506 19,567 (7,330)
Accrued expenses and other liabilities................. 2,640 (6,122) (2,563)
Other, net............................................. -- 71 891
--------- -------- ---------
Net cash provided by continuing operations................ 40,779 53,551 18,264
Net cash provided by discontinued operations.............. 1,521 2,088 (1,587)
--------- -------- ---------
Net cash provided by operations activities................ 42,300 55,639 16,677
--------- -------- ---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired and contingent
consideration.......................................... (4,553) (1,665) (8,973)
Proceeds from divested operations......................... 3,122 14,005 6,599
Proceeds from discontinued operations..................... 4,639 -- 28,000
Additions to property and equipment, net.................. (8,157) (12,680) (19,670)
Net (increase) decrease in notes receivable............... 1,902 (842) 2,194
--------- -------- ---------
Net cash provided by (used in) investing
activities...................................... (3,047) (1,182) 8,150
--------- -------- ---------
Cash flows from financing activities:
Proceeds from bank debt................................... 62,600 27,900 102,600
Proceeds from notes payable and capitalized leases........ 607 478 3,296
Payment of bank debt...................................... (100,100) (90,400) (129,100)
Payment of notes payable and capitalized leases........... (899) (3,770) (10,534)
Proceeds from stock issuances, net of treasury
repurchase............................................. -- (410) 17
Proceeds from exercise of stock options and warrants...... 550 115 124
--------- -------- ---------
Net cash used in financing activities............. (37,242) (66,087) (33,597)
--------- -------- ---------
Net decrease in cash and cash equivalents................... 2,011 (11,630) (8,770)
Cash and cash equivalents at beginning of year.............. 4,340 15,970 24,740
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 6,351 $ 4,340 $ 15,970
========= ======== =========
2003 (In thousands)
| | | | | | | | | | | | | | | |
| | | | | 2004 | | | 2003 | |
| | | 2005 | | | (Revised) | | | (Revised) | |
| | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 18,673 | | | $ | 16,051 | | | $ | 15,316 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| | Loss from operations of discontinued operations | | | 6,463 | | | | 5,429 | | | | 725 | |
| | Gain on disposal of discontinued operations | | | (3,550 | ) | | | (132 | ) | | | (726 | ) |
| | Gain on sale of operations, net | | | (314 | ) | | | (996 | ) | | | (2,519 | ) |
| | Bad debt expense, net of recoveries | | | 5,170 | | | | 4,160 | | | | 4,891 | |
| | Impairment of notes receivable | | | — | | | | — | | | | 2,394 | |
| | Notes payable extinguishment | | | (65 | ) | | | (743 | ) | | | — | |
| | Depreciation and amortization | | | 15,163 | | | | 16,010 | | | | 16,581 | |
| | Deferred income taxes | | | (2,480 | ) | | | (3,573 | ) | | | 1,800 | |
| | Stock awards | | | 1,466 | | | | 449 | | | | 280 | |
| Changes in assets and liabilities, net of acquisitions and dispositions | | | | | | | | | | | | |
| | Restricted cash | | | 216 | | | | 791 | | | | 5,968 | |
| | Accounts receivable, net | | | (5,599 | ) | | | (11,987 | ) | | | (10,018 | ) |
| | Other assets | | | (8,318 | ) | | | (6,782 | ) | | | (1,571 | ) |
| | Accounts payable | | | 1,204 | | | | (2,666 | ) | | | 6,110 | |
| | Income taxes | | | 6,177 | | | | (6,974 | ) | | | 3,789 | |
| | Accrued personnel | | | 11,615 | | | | 4,199 | | | | 3,530 | |
| | Accrued expenses and other liabilities | | | 6,146 | | | | 4,861 | | | | (10,288 | ) |
| | | | | | | | | | |
| Net cash provided by continuing operations | | | 51,967 | | | | 18,097 | | | | 36,262 | |
| Operating cash flows provided by discontinued operations | | | 855 | | | | 1,589 | | | | 2,674 | |
| | | | | | | | | | |
| Net cash provided by operating activities | | | 52,822 | | | | 19,686 | | | | 38,936 | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
| Business acquisitions including contingent consideration earned, net of cash acquired | | | (12,611 | ) | | | (5,662 | ) | | | (3,849 | ) |
| Proceeds from sales of divested operations | | | 133 | | | | 3,030 | | | | 5,590 | |
| Proceeds from sales of discontinued operations | | | 2,000 | | | | 1,549 | | | | 1,599 | |
| Additions to notes receivable | | | — | | | | (2,267 | ) | | | (913 | ) |
| Additions to property and equipment, net | | | (6,903 | ) | | | (7,384 | ) | | | (10,408 | ) |
| Decreases in notes receivable | | | 1,672 | | | | 2,462 | | | | 2,667 | |
| Investing cash flows provided by (used in) discontinued operations | | | 1,457 | | | | (317 | ) | | | 707 | |
| | | | | | | | | | |
| | | Net cash used in investing activities | | | (14,252 | ) | | | (8,589 | ) | | | (4,607 | ) |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from bank debt | | | 253,200 | | | | 288,855 | | | | 225,950 | |
| Proceeds from notes payable | | | 87 | | | | — | | | | 324 | |
| Payment of bank debt | | | (274,900 | ) | | | (248,955 | ) | | | (229,450 | ) |
| Payment of notes payable and capitalized leases | | | (845 | ) | | | (428 | ) | | | (1,062 | ) |
| Payment for acquisition of treasury stock | | | (16,667 | ) | | | (50,419 | ) | | | (33,578 | ) |
| Proceeds from exercise of stock options | | | 4,173 | | | | 1,350 | | | | 927 | |
| | | | | | | | | | |
| | Net cash used in financing activities | | | (34,952 | ) | | | (9,597 | ) | | | (36,889 | ) |
| | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 3,618 | | | | 1,500 | | | | (2,560 | ) |
| Cash and cash equivalents at beginning of year | | | 5,291 | | | | 3,791 | | | | 6,351 | |
| | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 8,909 | | | $ | 5,291 | | | $ | 3,791 | |
| | | | | | | | | | |
See the accompanying notes to the consolidated financial statements.
F-6
CENTURY BUSINESS SERVICES,F-7
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| |
| 1. | Organization and Summary of Significant Accounting Policies |
Organization
Century Business Services,
CBIZ, Inc. and its wholly-owned subsidiaries (CBIZ)
areis a diversified services company which, acting through its subsidiaries, provides professional 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, Inc. offers integrated services through its three practice groups: accounting,
taxAccounting, Tax and advisory services, benefitsAdvisory Services (ATA), Benefits and insurance services,Insurance Services (B&I), and national
practices.
BasisNational Practices.
Principles of Consolidation
The accompanying consolidated financial statements includereflect the accountsoperations of CBIZ.CBIZ, Inc. and all of its wholly-owned subsidiaries (CBIZ). All intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations or cash flows of CBIZ. See further discussion under “Variable Interest Entities” below.
Use of Estimates
Preparing the
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosuresdisclosure of contingent assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenuesrevenue and expenses forexpenses. Management’s estimates and assumptions include, but are not limited to, estimates of collectibility of accounts receivable and unbilled revenue, the reporting period.realizability of goodwill and other intangible assets, accrued liabilities (such as incentive compensation), income taxes and other factors. Management’s estimates and assumptions are derived from and are continually evaluated based upon available information, judgment and experience. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2004 and 2003 consolidated financial statements have been reclassified to conform to the current year presentation. Reclassifications include, but may not be limited to: legal settlements (previously reported as other income (expense), net, which are now reported as corporate general and administrative expense), discontinued operations and certain other expenses that were reclassified between operating and corporate general and administrative expenses.
In 2005, CBIZ has separately disclosed the operating and investing portions of the cash flows attributable to its discontinued operations, which in prior periods were combined and reported as a single amount. Prior periods have been revised to conform to the current year presentation. There were no financing activities attributable to the operations of discontinued operations in 2005, 2004 or 2003.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term highly liquid investments with aan original maturity of three months or less at the date of purchase. The
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,regulations. Restricted cash also represents funds on deposit from clients in connection with the administering and settling of claims, and the pass through of insurance premiums to the carrier. Thecarrier; the related liability for these funds is recorded in accrued expenses and other current liabilities in the consolidated balance sheets.
F-8
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Funds Held for Clients and Client FundsFund Obligations
As part of its payroll and payroll tax filing
Payroll services provided by CBIZ is engaged ininclude the preparation of payroll checks, federal, state, and local payroll tax returns, and the collection and remittance of payroll obligations.flexible spending account administration. In relation to its payrollthese services, CBIZ collects payroll funds from its client's accountclients’ accounts 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 taxing authorities. Those fundsthese client obligations. Funds that are collected before they are due are investedsegregated and reported separately as “funds held for clients” in the consolidated balance sheets, and may include cash, cash equivalents and short-term investment grade instruments. The fundsinvestments. Other than certain federal and state regulations pertaining to flexible spending account administration, there are no regulatory or other contractual restrictions placed on these funds. 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 amountamounts of collected but not yet remitted funds for CBIZ's
payroll and tax filing services variesmay vary significantly during the year.
One of the business units classified as a discontinued operation collects funds from clients’ accounts in advance of paying the related client obligations. These funds and related liabilities are reported as “assets of discontinued operations” and “liabilities of discontinued operations,” respectively, in the accompanying consolidated balance sheets. The amount of funds held for clients by our discontinued operations is disclosed in Note 18.
Assets of Deferred Compensation Plan
Assets of the deferred compensation plan represent marketable investments that consist primarily of mutual funds, money market funds and equity securities. CBIZ classifies these marketable securities as “trading” securities under Statement of Financial Accounting Standard (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” In accordance with the provisions of this statement, the investment balance is stated at fair market value based on quoted market prices, and realized and unrealized gains and losses are reflected in earnings. The assets held in the deferred compensation plan reflect amounts due to employees, but are available for general creditors of CBIZ in the event CBIZ becomes insolvent. As such, CBIZ has recorded the investment as a non-current asset titled “assets of deferred compensation plan” and has established a corresponding other long-term liability entitled “deferred compensation plan obligations” in the consolidated balance sheets.
Derivative Instruments and Hedging Activities
In January 2001,
CBIZ
adoptedrecords derivative instruments in accordance with SFAS No. 133,
"Accounting“Accounting for Derivative Instruments and Hedging
Activities".Activities,” as subsequently amended by SFAS
No. 133 requires that entities
recognize all derivatives137, SFAS 138 and SFAS 149. Derivatives are recognized as either assets or liabilities in the
statement of
financial positionconsolidated balance sheets and
measure those instrumentsare measured at fair value.
GainsThe treatment of gains and losses resulting from
F-7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED changes in the fair values of those derivatives are to be accounted for
dependingderivative instruments is dependent on the use of the respective derivative instruments and whether it qualifiesthey qualify for hedge accounting.CBIZ entered intodid not utilize derivative instruments in 2005 or 2004. In 2003, CBIZ terminated an interest rate swap that was originated in 2001. The interest rate swap agreement which qualifiesqualified as a cash flow hedge, in 2001.which was used to manage the interest rate mix of its credit facility and related overall cost of borrowing. For the year ended December 31, 2002, the change in fair value relating to CBIZ'sCBIZ’s hedging activity resulted in a loss of approximately $0.3 million, which is recorded in stockholders'stockholders’ equity under accumulated other comprehensive loss.
Other
Fair Value of Financial Instruments
The carrying amountamounts of CBIZ'sCBIZ’s cash and cash equivalents, accounts receivable and accounts payable approximatesapproximate 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.
Accounts Receivable and Allowance for Doubtful Accounts
CBIZ carries accounts receivable at their face amount less allowances for doubtful accounts, and carries unbilled revenues at net realizable value. Assessing the collectibility of receivables (billed and unbilled) requires
F-9
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
management judgment. When evaluating the adequacy of the allowance for doubtful accounts and the overall collectibility of receivables, CBIZ analyzes historical bad debts, client credit-worthiness, the age of accounts receivable and current economic trends and conditions.
Concentrations of Credit Risk
Financial instruments that may subject CBIZ to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. CBIZ places its cash and cash equivalents with highly-rated financial institutions, limiting the amount of credit exposure with any one financial institution. In addition, CBIZ conducts on-going evaluation of credit-worthiness of the financial institutions with which it does business. CBIZ’s client base consists of large numbers of geographically diverse customers dispersed throughout the United States; thus, concentration of credit risk with respect to accounts receivable is not considered significant.
Goodwill and Other Intangible Assets
Effective June 30, 2001,
CBIZ adopted Statement of Financial Accounting
Standard No., 141 "Business Combinations" (SFAS 141), which requires thatutilizes the purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Intangiblein accordance with SFAS No. 141, “Business Combinations.” Identifiable intangible assets include finite-lived purchased intangible assets, which primarily consist of client lists and non-compete agreements. These intangible assets are amortized principally byusing the straight-line method over their expected periodperiods of benefit, not exceedinggenerally two to ten years
Effective January 1, 2002, CBIZ adopted Statementyears.
In accordance with the provisions of Financial Accounting
Standard No.,SFAS 142, "Goodwill“Goodwill and Other Intangible Assets" (SFAS 142), which
requires thatAssets,” goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead beis not amortized. Goodwill is tested for impairment at least annually atduring the reporting unit level. Prior to the adoptionfourth quarter of SFAS 142, goodwill was
amortized over periods not exceeding 15 years. In connection with the adoption
of SFAS 142, CBIZ recorded a non-cash impairment charge of $88.6 million on a
pretax basis, which was recorded as a cumulative effect of a change in
accounting principle in the accompanying consolidated statement of operations.
CBIZ conducts a formal impairment test of goodwill on an annual basiseach year, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. To conduct a goodwill impairment test, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, CBIZ performed its annualrecords an impairment reviewloss to the extent that the carrying value of goodwill as of the
beginning of the fourth quarter of fiscal 2002exceeds its implied fair value. Fair values for reporting units are estimated using discounted cash flow valuation models.
Long-Lived Assets
Long-lived assets primarily include property and determined that no impairment
of goodwill existed.
Otherequipment and identifiable intangible assets including purchased client lists and non-compete
agreements, are amortized over their estimated useful lives and reviewed for
impairment inwith finite lives. In accordance with SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets." CBIZ reviews the carrying value of its
long-livedAssets”, these assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or groups of assets may not be fully recoverable. Recoverability of long-lived assets or groups of assets is assessed bybased on a comparison of the carrying
amountundiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the estimated future net cash flows expected to be
generated by the asset.
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 technologies or products they have under development
are typically in the early stages. Thefair value of these investments is influencedlong-lived assets includes significant judgment by many factors, including the operating effectiveness of these companies, the
overall health of the companies' industries, the strength of the private equity
marketsmanagement, and general market conditions.
different judgments could yield different results.
Property and Equipment
Property and equipment
areis recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line basis over
the following estimated useful
lives.
F-8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
lives: | | |
| Buildings | | 25 years |
| Furniture and fixtures | | 5 to 10 years |
| Capitalized software | | 2 to 7 years |
| Equipment | | 3 to 7 years |
Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the respective lease.
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“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,"Use.” The
F-10
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
costs are amortized to expense using the straight line method over an estimated useful life not to exceed seven years. The cost ofCapitalized software purchased or developed to be marketed,
including software acquired through acquisitions of businesses, is capitalizedclassified as property and amortized over its estimated economic lifeequipment in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed."
consolidated balance sheets.
Income Taxes
Income taxes are accountedprovided for under the assettax effects of transactions reported in the financial statements and liability method.consist of taxes currently due and deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basesbasis and operating loss and tax credit carry-forwards. Deferredcarryforwards. State income tax assets and
liabilitiescredits are measured using enacted tax rates expected to apply to taxable
income inaccounted for by the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. flow-through method.
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. CBIZ determines a valuation allowance based on the analysis of amounts available in the statutory carryback period,or carryforward periods, consideration of future deductible amounts, and assessment of the consolidated and/or separate company profitability of
certain acquired entities.
profitability.
Revenue Recognition and SAB 101
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. These criteria are in accordance with Generally Accepted Accounting Principles (GAAP) and SEC Staff Accounting Bulletin No. 104 (SAB 104). CBIZ offers a vast array of outsourcedproducts and 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 --below.
Certain of our client arrangements encompass multiple deliverables. CBIZ accounts for these arrangements in accordance with Emerging Issues Task Force No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (EITF 00-21). If the deliverables meet the criteria in EITF 00-21, the deliverables are divided into separate units of accounting and revenue is allocated to the deliverables based on their relative fair values. Revenue for each unit is recognized separately in accordance with CBIZ’s revenue recognition policy for each unit. For those arrangements where the deliverables do not qualify as a separate unit of accounting, revenue from all deliverables are treated as one accounting unit and recognized on a pro-rata basis over the term of the arrangement.
Accounting, Tax and Advisory Services — Revenue consists primarily of fees for accounting services, preparation of tax returns, and consulting services.services including Sarbanes-Oxley consulting and compliance projects. Revenues are recorded in the period in which theyservices are earned.provided and meet revenue recognition criteria in accordance with SAB 104. CBIZ bills clients based upon a predetermined agreed uponagreed-upon fixed fee or actual hours incurred on client projects at expected net realizable rates per hour, plus any
out-of-pocketout-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 --
Through one of its ATA units, CBIZ provides flexible benefits administration services to clients, grants access of its proprietary software to third parties, and provides hosting to these parties. Revenue associated with set up and license fees related to our flexible benefits services are deferred and recognized pro rata over the life of the contract.
Benefits and Insurance Services — Revenue consists primarily of brokerage and agency commissions, and fee income for administering health and retirement plans. Commissions relating to brokerage and agency activities whereby CBIZ has primary
responsibility for the collection of premiums from insured's are generally
recognized asA description of the latter of the effective date ofrevenue recognition, based on the insurance policy or the
date billed to the customer. Commissions to be received directly from insurance
companies are generally recognized when the amounts are determined. Life
insurance commissions are recorded on the accrual basis. Commission revenueproduct and billing arrangement, is reported net of sub-broker commissions. Contingent commissions are generally
recognized when received. Fee income is recognized as services are rendered.
NATIONAL PRACTICES --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; and |
F-11
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | life insurance commissions are recognized when the policy becomes effective. Commission revenue is reported net of sub-broker commissions. Commission revenue is reported net of reserves for estimated policy cancellations and terminations. This reserve is based upon estimates and assumptions using historical cancellation and termination experience and other current factors to project future experience. CBIZ periodically reviews the adequacy of the reserve and makes adjustments as necessary. The use of different estimates or assumptions could produce different results. |
|
| • | Commissions which are based upon certain performance targets are recognized at the earlier of written notification that the target has been achieved, 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. |
National Practices Services — 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:
- below.
| | |
| • | Mergers & Acquisitions and Capital Advisory — Revenue associated with non-refundable retainers is recognized on a pro rata basis over the life of the engagement. Revenue associated with success fee transactions is recognized when the transaction is completed. |
|
| • | Technology Consulting — Revenue associated with hardware and software sales is recognized upon delivery and acceptance of the product. Revenue associated with installation is recognized as services are performed, and revenue associated with service agreements is recognized on a straight-line basis. Consulting revenue is recognized on an hourly or per diem fee basis as services are performed. |
|
| • | Valuation — Revenue consists primarily of fees for valuation services such as fairness opinions, business plans, litigation support, purchase price allocations and derivative valuations. 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 anyout-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. |
|
| • | Payroll — Revenue is recognized when the actual payroll processing occurs. |
|
| • | Medical Management Group — Fees for services are primarily based on a percentage of net collections on our clients’ patient accounts receivable. As such, revenue is determinable, earned, and recognized, when payments are received on our clients’ patient accounts. |
Operating Expenses
Operating expenses represent costs of service, as well as other costs incurred to operate our business units. These costs are primarily personnel related expenses, occupancy expenses, and Capital Advisory -- Revenue associatedconsolidation and integration related expenses. Personnel costs include base compensation, commissions, payroll taxes, and benefits, which are recognized as expense as they are incurred, and incentive compensation costs which are estimated and accrued on a monthly basis. The ultimate determination of incentive compensation is made after year-end results are finalized, thus estimates are subject to change. Total personnel costs were $353.0 million, $317.7 million and $304.3 million for the years ended December 31, 2005, 2004, and 2003, respectively.
The largest components of occupancy costs are rent expense and utilities. Rent expense is recognized over respective lease terms (see “operating leases” below), and utilities are recognized as incurred. Total occupancy costs were $35.5 million, $34.1 million and $33.6 million for the years ended December 31, 2005, 2004, and 2003, respectively.
Consolidation and integration charges are accounted for in accordance with non-refundable retainersSFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Accordingly, CBIZ recognizes a liability for non-cancelable lease obligations based upon the net present value of remaining lease payments, net of estimated sublease
F-12
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payments. The liability is determined and recognized as of the cease-use date and adjustments to the liability are made for changes in estimates in the period in which a change becomes known.
Operating Leases
CBIZ leases certain of its office facilities and equipment under various operating leases. Rent expense under such leases is recognized in accordance with SFAS 13, “Accounting for Leases”. SFAS 13 requires lessees to record rent expense evenly throughout the term of the lease obligation when the lease commitment is a known amount, but allows for rent expense to be recorded on a cash basis when future rent payments under the obligation are unknown because the rent escalations are tied to factors that are not currently measurable (such as increases in the consumer price index). Differences between rent expense recognized and the cash payments required under operating lease obligations, are recorded in the consolidated balance sheets as other current or non-current liabilities as appropriate.
CBIZ may receive incentives to lease office facilities in certain areas. In accordance with SFAS 13, such incentives are recorded as a deferred credit and recognized as a reduction to rent expense on a straight-line basis over the lifelease term. Leasehold improvements made at the inception of or during the lease are amortized over the shorter of the engagement. Revenue associatedasset life or the lease term.
Variable Interest Entities
Effective January 1, 2004, CBIZ adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), as amended. In accordance with
success fee transactions
are recognized when the
transaction is completed.
- Technology Consulting -- Revenue associatedprovisions of the aforementioned standard, CBIZ has determined that its relationship with
hardware and software
sales are recognized upon delivery and acceptance. Revenue associatedcertain Certified Public Accounting (CPA) firms with
installation andwhom we maintain administrative service agreements
are recognized(ASAs) qualify as
F-9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
services are performed and maintenance agreements are recognized ratably overvariable interest entities. The accompanying financial statements do not reflect the termconsolidation of the agreement. Consultingvariable interest entities, as the impact is not material to the financial condition, results of operations or cash flows of CBIZ. The CPA firms with which CBIZ maintains administrative service agreements operate as limited liability companies, limited liability partnerships or professional corporations. The firms are separate legal entities with separate governing bodies and officers. CBIZ has no ownership interest in any of these CPA firms, and 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 each of its respective services, and CBIZ does not believe that its arrangements with these CPA firms result in additional risk of loss.
Fees earned by CBIZ under the ASAs are recorded as revenue (at net realizable value) in the consolidated statements of operations. In the event that accounts receivable and unbilled work in process become uncollectible by the CPA firms, the service fee due to CBIZ is recognized on an hourly or per
diem fee basis.
- Valuation and Property Tax -- Revenue associated with retainer contracts
are recognizedreduced on a straight-line basis overpro-rata basis. Although the lifeadministrative service agreements do not constitute control, CBIZ is one 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 revenue cycle has been completed.
- Medical Practice Management -- Revenue is recognized when collections are
received on our clients' patient accounts.
During the fourth quarter of 2000, CBIZ adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
the Financial Statements." SAB 101 summarizes certainbeneficiaries of the Commission's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. In light of the guidance to conform to SAB 101agreements and the
SEC's "Frequently Asked Questions and Answers" bulletin released on October 12,
2000, CBIZ changedmay bear certain revenue recognition policies effective January 1,
2000. Prior to this change CBIZ's revenue recognition had been in accordance
with GAAP and industry standards.
Due to this change, CBIZ recorded a cumulative adjustment in the first
quarter 2000 of $11.9 million (net of tax benefit of $7.9 million). The impact
in 2000 of adopting SAB 101 resulted in a reduction in revenue of approximately
$18.2 million, a reduction in operating expense of approximately $11.4 million,
and a reduction in income from continuing operations (before cumulative effect
of accounting change) of approximately $6.8 million (pretax). See note 7 for the
impact on deferred taxes and note 19 for the impact on previously reported
quarterly financial information.
economic risks.
Earnings per Share
Basic earnings (loss) per share areis computed by dividing net income (loss) by the weighted average number of common shares outstanding forduring the period. Diluted earnings per share includeis computed by dividing net income by weighted average diluted shares. Weighted average diluted shares are determined using the weighted average number of common shares outstanding during the period plus the dilutive effect of potential future issues of common stock relating to CBIZ’s stock award programs and other potentially dilutive securities. In calculating diluted earnings per share, the dilutive effect of stock awards are computed using the average market price for the period in accordance with the treasury stock method.
F-13
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Based Awards
CBIZ accounts for its employee stock options warrants and
contingent shares.in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Options
CompensationIssued 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. See note
12applied in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” Had the cost of stock option plans been determined based on the fair value of options at the grant date, CBIZ’s net income and earnings per share pro forma amounts would be as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| | | As Reported | | | Pro Forma(1) | |
| | | | | | | |
| | | Basic | | | Diluted | | | Basic | | | Diluted | |
| | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | | | | |
| Net income | | $ | 18,673 | | | $ | 18,673 | | | $ | 17,573 | | | $ | 17,573 | |
| | | | | | | | | | | | | |
| Net income per share | | $ | 0.25 | | | $ | 0.24 | | | $ | 0.24 | | | $ | 0.23 | |
| | | | | | | | | | | | | |
2004 | | | | | | | | | | | | | | | | |
| Net income | | $ | 16,051 | | | $ | 16,051 | | | $ | 14,629 | | | $ | 14,629 | |
| | | | | | | | | | | | | |
| Net income per share | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.18 | | | $ | 0.18 | |
| | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | | | | |
| Net income | | $ | 15,316 | | | $ | 15,316 | | | $ | 14,792 | | | $ | 14,792 | |
| | | | | | | | | | | | | |
| Net income per share | | $ | 0.17 | | | $ | 0.17 | | | $ | 0.16 | | | $ | 0.16 | |
| | | | | | | | | | | | | |
| |
| (1) | A tax rate of 40.0% was applied to the fair value of options in determining pro forma net income for each of the years ended December 31, 2005, 2004 and 2003. |
The above results may not be representative of the effects on net income for future years. CBIZ applied the Black-Scholes option-pricing model to
determine the
consolidated financial statements.
Reclassifications
Certain amounts in the prior periods consolidated financial statements have
been reclassified to conform to the current year's presentation.
F-10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. ACCOUNTS RECEIVABLE
Accounts receivable forfair value of each option granted during the years ended December 31, 20022005, 2004 and 20012003, using the following weighted-average assumptions: | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Weighted average grant-date fair value of options granted | | $ | 1.65 | | | $ | 1.42 | | | $ | 0.95 | |
| Risk-free interest rate | | | 3.90 | % | | | 3.89 | % | | | 2.36 | % |
| Expected volatility | | | 49.71 | % | | | 36.57 | % | | | 35.54 | % |
| Expected option life (in years) | | | 5.00 | | | | 5.00 | | | | 5.00 | |
| Dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Restricted stock awards are independent of option grants, and are granted at no cost to the recipients. The market value of shares awarded is recorded as unearned compensation, and is expensed ratably over the period which restrictions lapse.
Guarantees
CBIZ recognizes a liability for the fair value of obligations undertaken in issuing guarantees, in accordance with the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, as amended (FIN 45). The liability is recognized at the inception of such guarantees, and is recorded as other current liabilities in the consolidated balance sheets.
F-14
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 2. | Accounts Receivable, Net |
Accounts receivable balances at December 31, 2005 and 2004 were as follows (in thousands):
| | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| Trade accounts receivable | | $ | 83,683 | | | $ | 81,023 | |
| Unbilled revenue | | | 19,582 | | | | 21,353 | |
| Other accounts receivable | | | 1,721 | | | | 2,615 | |
| | | | | | | |
| | Total accounts receivable | | | 104,986 | | | | 104,991 | |
| Allowance for doubtful accounts | | | (5,801 | ) | | | (5,970 | ) |
| | | | | | | |
| | Accounts receivable, net | | $ | 99,185 | | | $ | 99,021 | |
| | | | | | | |
2002 2001
-------- --------
Trade accounts receivable................................... $ 82,694 $103,097
Unbilled revenues........................................... 29,123 22,289
-------- --------
Total accounts receivable................................... 111,817 125,386
Less allowance for doubtful accounts........................ (8,835) (12,720)
-------- --------
Accounts receivable, net.................................... $102,982 $112,666
======== ========
| |
| 3. | Notes Receivable |
3. NOTES RECEIVABLE
The notesNotes receivable balance of $9.6 million and $7.3 million for the years
ended December 31, 2002 and 2001, respectively consisted of: (i) the HarborView
note related to HarborView Partners LLC agreement with a balance of $2.3 million
and $1.0 millionbalances at December 31, 20022005 and 2001, respectively; (ii) the Philip
note taken in connection with the divestiture of the hazardous waste operations
in 1997 with a balance of $2.4 million and $3.2 million at December 31, 2002 and
2001 respectively; and (iii) $4.0 million and $2.2 million of notes taken2004 were as consideration for divestitures as December 2002 and 2001 respectively. The
Philip note was written down by $0.8 million at September 30, 2002 due to
management's growing concern of the Philip Services Corporation's ability to
pay. The balances of other miscellaneous note receivables were $0.9 million and
$0.9 million for the year ended December 31, 2002 and 2001, respectively.
4. INVESTMENTS
The investments balance of $0.6 million and $2.2 million for the years
ended December 31, 2002 and 2001 respectively, are included in other assets
(non-current) and are accounted for under the cost method of accounting. CBIZ's
primary investment is in Statement One, Inc. which was purchased in 1999 and has
a carrying value of $0.6 million which represents an ownership interest of 4%.
On September 30, 2002, this investment was written down due to a decrease in the
market valuation of the investment. CBIZ also holds a 3% ownership interest in
QuikCAT Technologies, however management doubts QuikCAT's ability to reach
profitability and, as such, has considered the QuickCAT investment fully
impaired. In September 2002, CBIZ wrote-off the QuickCAT investment of $1.3
million and a related outstanding trade receivable of $0.5 million.
5. PROPERTY AND EQUIPMENT
follows (in thousands):
| | | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
Current | | | | | | | | |
| Notes in lieu of cash as consideration for the sale of operations | | $ | 5,378 | | | $ | 1,125 | |
| Other | | | 664 | | | | 252 | |
| | | | | | | |
| | Total notes receivable — current | | | 6,042 | | | | 1,377 | |
Non-Current | | | | | | | | |
| Notes in lieu of cash as consideration for the sale of operations | | | 1,215 | | | | 2,169 | |
| Other | | | 2,360 | | | | 2,557 | |
| | | | | | | |
| | Total notes receivable — non-current | | | 3,575 | | | | 4,726 | |
| | | | | | | |
| | | Notes receivable | | $ | 9,617 | | | $ | 6,103 | |
| | | | | | | |
| |
| 4. | Property and Equipment, Net |
Property and equipment, net at December 31,
20022005 and
20012004 consisted of the following (in thousands):
2002 2001
-------- --------
Buildings and improvements.................................. $ 9,870 $ 10,001
Furniture and fixtures...................................... 14,927 20,039
Equipment and capitalized software.......................... 67,599 60,919
-------- --------
92,396 90,959
Accumulated depreciation and amortization................... (47,796) (38,014)
-------- --------
$ 44,600 $ 52,945
======== ========
| | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| Buildings and leasehold improvements | | $ | 12,806 | | | $ | 12,466 | |
| Furniture and fixtures | | | 18,023 | | | | 16,129 | |
| Capitalized software | | | 41,874 | | | | 39,683 | |
| Equipment | | | 28,500 | | | | 28,927 | |
| | | | | | | |
| | Total property and equipment | | | 101,203 | | | | 97,205 | |
| Accumulated depreciation and amortization | | | (67,717 | ) | | | (61,182 | ) |
| | | | | | | |
| | Property and equipment, net | | $ | 33,486 | | | $ | 36,023 | |
| | | | | | | |
Depreciation
and amortization expense was approximately
$16.0$11.2 million,
$14.5$12.1 million, and
$14.0$13.1 million
in 2002, 2001during the years ended December 31, 2005, 2004 and
2000, respectively.
F-11
CENTURY BUSINESS SERVICES,2003, respectively, of which $6.3 million, $5.6 million and $5.5 million represented the amortization of capitalized software.F-15
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
— (Continued)
| |
| 5. | Goodwill and Other Intangible Assets, Net |
The components of
goodwill and other intangible assets, net
areat December 31, 2005 and 2004 were as follows (in thousands):
2002 2001
-------- --------
Goodwill, net of accumulated amortization................... $157,035 $242,622
Intangibles:
Client lists.............................................. 9,216 6,606
Other..................................................... 484 430
-------- --------
Total intangibles........................................... 9,700 7,036
-------- --------
Total goodwill and other intangibles assets................. 166,736 249,658
Less accumulated amortization............................... (3,030) (2,593)
-------- --------
Total goodwill and other intangible assets, net............. $163,706 $247,065
======== ========
| | | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| Goodwill | | $ | 168,902 | | | $ | 159,807 | |
| Intangibles: | | | | | | | | |
| | Client lists | | | 23,498 | | | | 18,033 | |
| | Other intangibles | | | 1,493 | | | | 972 | |
| | | | | | | |
| | Total intangibles | | | 24,991 | | | | 19,005 | |
| | | | | | | |
| | | Total goodwill and other intangibles assets | | | 193,893 | | | | 178,812 | |
| Less accumulated amortization | | | (8,358 | ) | | | (6,168 | ) |
| | | | | | | |
| | | Goodwill and other intangible assets, net | | $ | 185,535 | | | $ | 172,644 | |
| | | | | | | |
Client lists are primarily amortized over a periodperiods not to exceedexceeding ten years. Other intangibles, which consist primarily of non-compete agreements, expirations, trademarks and website costs; and are amortized over a periodperiods ranging from threetwo to ten years. ChangesAmortization expense (excluding impairment charges as described below) of client lists and other intangible assets was approximately $2.6 million, $1.8 million and $1.5 million during the years ended December 31, 2005, 2004 and 2003, respectively. Amortization expense for client lists and other intangible assets for each of the next five years is estimated to be (in thousands):
| | | | | |
| Year Ended December 31, | | |
| | | |
| 2006 | | $ | 2,541 | |
| | | | |
| 2007 | | $ | 2,444 | |
| | | | |
| 2008 | | $ | 2,205 | |
| | | | |
| 2009 | | $ | 2,101 | |
| | | | |
| 2010 | | $ | 1,859 | |
| | | | |
This estimate excludes the impact of events that may occur subsequent to December 31, 2005, including acquisitions, divestitures and additional purchase price that may be earned in goodwillconnection with acquisitions that occurred prior to December 31, 2005.
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, CBIZ recorded non-cash pre-tax impairment charges of $0.2 million and $0.3 million during the years ended December 31, 2004 and 2003, respectively. The impairment charges are reported as depreciation and amortization expense in the accompanying consolidated statements of operations and relate to client lists from our Accounting, Tax and Advisory, and Benefits and Insurance practice groups that were purchased in 2000 and 1999, respectively. There were no impairment charges recorded during the year ended December 31,
2002 are as follows:
BALANCE BALANCE
DECEMBER 31, SALE OF IMPAIRMENT DECEMBER 31,
SEGMENT UNIT 2001 ADDITIONS BUSINESS CHARGE 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
-------- ------ ------- -------- --------
Subtotal.............................. 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, 2002,2005. F-16
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the carrying amount of goodwill was being amortized over periods not
exceeding 15 years. Pro forma net income (loss) and earnings (loss) per shareby reportable segment for the years ended December 2002, 200131, 2005 and 2000 adjusted to eliminate
historical amortization of goodwill and related tax effects, are2004 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Accounting, | | | | | Medical | | | National | | | |
| | | Tax and | | | Benefits and | | | Management | | | Practices- | | | Total | |
| | | Advisory | | | Insurance | | | Practice | | | Other | | | Goodwill | |
| | | | | | | | | | | | | | | | |
| December 31, 2003 | | $ | 91,367 | | | $ | 44,879 | | | $ | 17,212 | | | $ | 4,357 | | | $ | 157,815 | |
| Additions | | | 772 | | | | 628 | | | | — | | | | 1,219 | | | | 2,619 | |
| Divestitures | | | (627 | ) | | | — | | | | — | | | | — | | | | (627 | ) |
| | | | | | | | | | | | | | | | |
| December 31, 2004 | | | 91,512 | | | | 45,507 | | | | 17,212 | | | | 5,576 | | | | 159,807 | |
| Additions | | | 4,860 | | | | 3,643 | | | | — | | | | 592 | | | | 9,095 | |
| Divestitures | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| December 31, 2005 | | $ | 96,372 | | | $ | 49,150 | | | $ | 17,212 | | | $ | 6,168 | | | $ | 168,902 | |
| | | | | | | | | | | | | | | | |
2002 2001 2000
-------- -------- ---------
Previously reported net loss......................... $(76,848) $(16,000) $(126,076)
Goodwill amortization................................ -- 21,861 27,490
Tax impact........................................... -- (1,312) (1,650)
-------- -------- ---------
Pro forma net income (loss).......................... $(76,848) $ 4,549 $(100,236)
======== ======== =========
Previously reported basic EPS........................ $ (0.81) $ (0.17) $ (1.33)
Previously reported diluted EPS...................... $ (0.79) $ (0.17) $ (1.33)
Pro forma basic EPS.................................. $ (0.81) $ 0.05 $ (1.06)
Pro forma diluted EPS................................ $ (0.79) $ 0.05 $ (1.06)
| |
| 6. | Income Taxes |
F-12
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. INCOME TAXES
A summary of incomeIncome tax expense (benefit) included in the consolidated statements of operations
isfor the years ended December 31, 2005, 2004, and 2003 was as follows (in thousands):
2002 2001 2000
------- ------- --------
Continuing operations:
Current:
Federal and international.......................... $12,247 $ 9,517 $ 1,886
State and local.................................... (429) 4,162 832
------- ------- --------
11,818 13,679 2,718
Deferred.............................................. (3,694) (1,487) (1,204)
------- ------- --------
Total continuing operations...................... 8,124 12,192 1,514
Discontinued operations................................. 367 (1,855) (6,154)
Loss on sale of discontinued operations................. (1,413) -- (3,002)
Cumulative effect of change in accounting principle..... (8,584) -- (7,936)
------- ------- --------
$(1,506) $10,337 $(15,578)
======= ======= ========
| | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Continuing operations: | | | | | | | | | | | | |
| | Current: | | | | | | | | | | | | |
| | | Federal | | $ | 16,463 | | | $ | 9,870 | | | $ | 8,191 | |
| | | Foreign | | | (58 | ) | | | — | | | | — | |
| | | State and local | | | 646 | | | | 1,748 | | | | 1,927 | |
| | | | | | | | | | |
| | | | Total current income tax expense from continuing operations | | | 17,051 | | | | 11,618 | | | | 10,118 | |
| | Deferred: | | | | | | | | | | | | |
| | | Federal | | | (1,805 | ) | | | (2,827 | ) | | | 1,899 | |
| | | Foreign | | | — | | | | 32 | | | | 102 | |
| | | State and local | | | (675 | ) | | | (778 | ) | | | (201 | ) |
| | | | | | | | | | |
| | | | Total deferred income tax expense from continuing operations | | | (2,480 | ) | | | (3,573 | ) | | | 1,800 | |
| | | | | | | | | | |
| | | | Total income tax expense continuing operations | | | 14,571 | | | | 8,045 | | | | 11,918 | |
| Operations of discontinued operations | | | (3,795 | ) | | | (2,773 | ) | | | (331 | ) |
| Gain on sale of discontinued operations | | | 2,085 | | | | 266 | | | | 731 | |
| | | | | | | | | | |
| Total income tax expense | | $ | 12,861 | | | $ | 5,538 | | | $ | 12,318 | |
| | | | | | | | | | |
F-17
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision
(benefit) for income taxes attributable to earnings
(loss) from continuing operations differed from the amount obtained by applying the federal statutory income tax rate to income
(loss) from continuing operations before income taxes, as follows (in
thousands)thousands, except percentages):
2002 2001 2000
------ ------- --------
Tax at statutory rate.................................... $5,489 $ (359) $(31,472)
State taxes (net of federal benefit)..................... 530 103 (539)
Change in valuation allowance............................ 109 1,503 700
Nondeductible goodwill................................... -- 6,432 18,885
Disposal of non-core business units...................... 784 3,998 13,022
Other, net............................................... 1,212 515 918
------ ------- --------
Provision (benefit) for income taxes from continuing
operations............................................. $8,124 $12,192 $ 1,514
====== ======= ========
Effective income tax rate................................ 51.8% n/a n/a
====== ======= ========
F-13
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Tax at statutory rate | | $ | 12,655 | | | $ | 10,288 | | | $ | 9,532 | |
| State taxes (net of federal benefit) | | | 1,403 | | | | 1,444 | | | | 1,719 | |
| Tax credit carryforwards | | | (293 | ) | | | (280 | ) | | | (3,882 | ) |
| Change in valuation allowance | | | (250 | ) | | | (276 | ) | | | 4,555 | |
| Settlement of IRS examination 1998-2000 | | | — | | | | (3,550 | ) | | | 640 | |
| Non-deductible goodwill related to divested businesses | | | — | | | | 133 | | | | (361 | ) |
| Business meals and entertainment — non-deductible | | | 539 | | | | 660 | | | | 594 | |
| Other, net | | | 517 | | | | (374 | ) | | | (879 | ) |
| | | | | | | | | | |
| Provision for income taxes from continuing operations | | $ | 14,571 | | | $ | 8,045 | | | $ | 11,918 | |
| | | | | | | | | | |
| Effective income tax rate | | | 40.3 | % | | | 27.4 | % | | | 43.8 | % |
| | | | | | | | | | |
The net change in the valuation allowance for the year ended December 31, 2005 was primarily due to changes in the valuation allowances for state tax credit carryforwards, capital losses realized in excess of capital gains, and NOL carryforwards. The net change in the valuation allowance for the year ended December 31, 2004 was primarily due to changes in the valuation of NOL carryforwards. The net change in the valuation allowance for the year ended December 31, 2003 was due to increases in valuation allowances for NOL carryforwards, state tax credit carryforwards, and asset impairment charges, offset by a decrease in the valuation allowance for state deferred taxes related to an impairment of tax deductible goodwill.
The tax effects of temporary differences that
givegave rise to significant portions of the deferred tax assets and deferred tax liabilities from continuing operations at December 31,
20022005 and
2001, are2004, were as follows (in thousands):
2002 2001
------- ------
Deferred Tax Assets:
Net operating loss carryforwards............................ $ 5,829 $6,460
Allowance for doubtful accounts............................. 928 4,330
Consolidation and integration............................... 2,488 1,357
Cumulative change in accounting principle (SAB 101)......... 3,309 3,723
Goodwill impairment......................................... 9,437 1,386
Nondeductible reserve....................................... 668 1,387
Other deferred tax assets................................... 505 655
------- ------
Total gross deferred tax assets........................... 23,164 19,298
Less: valuation allowance................................. (3,775) (2,385)
------- ------
Net deferred tax assets................................... 19,389 16,913
------- ------
Deferred Tax Liabilities:
Change in accounting method................................. 492 2,940
Disposal of non-core business units......................... -- 1,333
Asset basis differential.................................... 4,750 3,059
Other deferred tax liabilities.............................. -- 28
------- ------
Total gross deferred tax liabilities...................... 5,242 7,360
------- ------
Net deferred tax asset...................................... $14,147 $9,553
======= ======
| | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
Deferred Tax Assets: | | | | | | | | |
| Net operating loss carryforwards | | $ | 5,717 | | | $ | 6,167 | |
| Allowance for doubtful accounts | | | 1,528 | | | | 2,307 | |
| Employee benefits and compensation | | | 5,637 | | | | 3,452 | |
| Cumulative change in accounting principle (SAB 101) | | | 2,588 | | | | 2,810 | |
| Lease costs | | | 2,356 | | | | 1,139 | |
| Goodwill and other intangibles | | | 257 | | | | 413 | |
| State tax credit carryforwards | | | 3,848 | | | | 3,782 | |
| Excess capital losses over capital gains | | | 1,952 | | | | 1,426 | |
| Other deferred tax assets | | | 473 | | | | 527 | |
| | | | | | | |
| | Total gross deferred tax assets | | | 24,356 | | | | 22,023 | |
| | Less: valuation allowance | | | (8,033 | ) | | | (8,283 | ) |
| | | | | | | |
| | Net deferred tax assets | | | 16,323 | | | | 13,740 | |
| | | | | | | |
Deferred Tax Liabilities: | | | | | | | | |
| Property and equipment depreciation | | | 1,841 | | | | 3,462 | |
| Other deferred tax liabilities | | | 2,048 | | | | (665 | ) |
| | | | | | | |
| | Total gross deferred tax liabilities | | | 3,889 | | | | 2,797 | |
| | | | | | | |
| Net deferred tax asset | | $ | 12,434 | | | $ | 10,943 | |
| | | | | | | |
F-18
CBIZ, had U.S.INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the fourth quarter of 2004, the Internal Revenue Service (IRS) made a final determination relative to its examination of CBIZ’s federal income tax returns for the years ended December 31, 1998, 1999, and 2000. The IRS agreed with CBIZ’s favorable tax position, which resulted in an income tax refund of $4.0 million for the years under examination. At December 31, 2004, this amount was recorded as income taxes recoverable in the accompanying consolidated balance sheet. CBIZ also recorded a deferred tax liability of $1.3 million, and reversed an accrual for income taxes payable of $0.8 million related to the audit results. These items resulted in a net tax benefit of $3.5 million during the year ended December 31, 2004. The tax refund was received in February 2005.
Net operating loss (NOL) carryforwards of approximately $3.0
million and $5.5 millionfor continuing operations at December 31, 2002,2005 and 2001, 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 $3.4 million and $3.3 million at December 31, 2002, and 2001,
respectively. The Canadian NOL carryforward begins to expire in 2006. CBIZ also
had state NOL carryforwards with a tax benefit of $4.3 million and $3.5 million
at December 31, 2002, and 2001, which have various expiration dates. 2004 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | NOL Carryforwards | | | Deferred Tax Benefit | | | |
| | | | | | | | | Expiration | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | Dates | |
| | | | | | | | | | | | | | | | |
| U.S. NOLs | | $ | 1,538 | | | $ | 1,940 | | | $ | 538 | | | $ | 679 | | | | 2008 | |
| Canadian NOLs | | $ | 4,361 | | | $ | 4,315 | | | | 1,744 | | | | 1,726 | | | | 2006 | |
| State NOLs | | $ | 73,291 | | | $ | 70,404 | | | | 3,435 | | | | 3,762 | | | | Various | |
| | | | | | | | | | | | | | | | |
| | Total NOLs | | | | | | | | | | | 5,717 | | | | 6,167 | | | | | |
| NOL valuation allowances | | | | | | | | | | | (4,805 | ) | | | (4,436 | ) | | | | |
| | | | | | | | | | | | | | | | |
| | Net NOLs | | | | | | | | | | $ | 912 | | | $ | 1,731 | | | | | |
| | | | | | | | | | | | | | | | |
The availability of all the NOL'sNOL’s is reported in the financial statement as deferred tax assets, net of the applicable valuation allowance.allowances, in the accompanying consolidated balance sheets. CBIZ has established valuation allowances for portions of the U.S., Canadian and state NOL carryforwards, state income tax credit carryforwards, and state deferred taxes related to tax deductible
goodwill. The net changefor capital losses realized in the valuation allowanceexcess of capital gains.
Bank debt balances for the years ended December 31, 20022005 and 2001 was2004 were as follows (in thousands, except percentages):
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| Revolving credit facility | | $ | 32,200 | | | $ | 53,900 | |
| | | | | | | |
| Weighted average rates | | | 5.39 | % | | | 3.54 | % |
| | | | | | | |
| Range of effective rates | | | 3.94% - 7.25 | % | | | 2.98% - 5.25 | % |
| | | | | | | |
During 2005, CBIZ maintained a $100.0 million credit facility with Bank of America as agent bank for a group of five participating banks. The credit facility had an
option to increase
of $2.5the commitment to $125.0 million and
$1.5was secured by substantially all assets of CBIZ, as well as the capital stock of its subsidiaries. The credit facility included a letter of credit sub-facility, allowing CBIZ to issue letters of credit up to $20.0 million. See Note 9 for further discussion regarding letters of credit. Management believes that the carrying amount of bank debt approximates its fair value, and CBIZ had approximately $54.1 million
respectively. The net change inof available funds under the
valuation allowance for NOL carry forwards
for the year ended December 31, 2002 and 2001 was an increase of $1.4 million
and $1.5 million, respectively. For December 31, 2002, $1.6 million was recorded
as an addition to income tax expense and $0.2 million was allocated to reduce
goodwill, and for December 31, 2001, the full amount was recorded as an addition
to income tax expense. A valuation allowance of $1.1 million was established for
the year ended December 31, 2002, for state deferred taxes related to an
impairment of tax deductible goodwill. The portion of the valuation allowance
for deferred tax assets for which subsequently recognized tax benefits will be
allocated to reduce goodwill of acquired entities is $0 and $0.5 millionfacility at December 31,
2002 and 2001.
F-14
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. BANK DEBT
Bank debt for the years ended December 31, 2002 and 2001 consists of the
following (in thousands):
2002 2001
------- -------
Bank debt:
Revolving credit facilities, effective rates of 3.83% to
6.625%................................................. $17,500 $55,000
======= =======
Weighted average rate..................................... 5.6% 7.6%
======= =======
In September 2002, CBIZ negotiated a new $73 million revolving2005. The credit facility with a group of four banks.provides CBIZ operating flexibility and funding to support seasonal working capital needs and other strategic initiatives such as acquisitions and share repurchases. Under the facility, loans are charged an interest rate consisting of a base rate or Eurodollar Liborrate plus an applicable margin. Additionally, a commitment fee of 4030 to 5045 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 all assets and capital stock of CBIZ and its subsidiaries.
The bank agreement containssubject to certain financial covenants. These covenants that may limit CBIZ’s ability to borrow up to the total commitment amount. Covenants require CBIZ to meet certain requirements with respect to (i) minimum tangible
net
F-19
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage ratio. Limitations are also placed on CBIZ'sCBIZ’s ability to acquire as well
asbusinesses, repurchase CBIZ common stock and to divest certain operations. As of December 31, 2002 CBIZ is in compliance with
its covenants
The bank credit agreement also places significant restrictions on CBIZ'sCBIZ’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. According to the terms of the agreement, CBIZ is not permitted to declare or make any dividend payments, other than dividend payments made by one of its wholly owned subsidiaries to the parent company. The agreement contains a provision that, in the event of a defined change in control, the agreement may be terminated.
Effective February 13, 2006, CBIZ entered into a new $100 million unsecured credit facility, which replaced the previous facility. The new facility has an option to increase the commitment to $150 million, is maintained by Bank of America, N.A. as agent bank for a group of five participating banks, and has a five year term expiring February 2011. Interest and commitment fees for the new facility are determined in a manner consistent with the previous facility, although the applicable margin and commitment fee percentages have been reduced. In addition, the ordinarymaximum leverage ratio has been increased, and limitations on share repurchases and acquisitions have been removed provided that the leverage ratio (total debt compared to EBITDA as defined by the facility) is less than 2.0.
Operating Leases
CBIZ leases certain of its office facilities and equipment under various operating leases. Future minimum cash commitments under operating leases as of December 31, 2005 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | | Gross | | | | | Net | |
| Years Ended | | Operating Lease | | | | | Operating Lease | |
| December 31, | | Commitments(1) | | | Subleases(1), (2) | | | Commitments(1) | |
| | | | | | | | | | |
| 2006 | | $ | 37,003 | | | $ | 1,730 | | | $ | 35,273 | |
| 2007 | | | 31,041 | | | | 1,611 | | | | 29,430 | |
| 2008 | | | 27,215 | | | | 1,294 | | | | 25,921 | |
| 2009 | | | 22,360 | | | | 948 | | | | 21,412 | |
| 2010 | | | 19,584 | | | | 652 | | | | 18,932 | |
| Thereafter | | | 66,475 | | | | 370 | | | | 66,105 | |
| | | | | | | | | | |
| | Total | | $ | 203,678 | | | $ | 6,605 | | | $ | 197,073 | |
| | | | | | | | | | |
| |
| (1) | Includes lease commitments accrued in the consolidation and integration reserve as of December 31, 2005. |
|
| (2) | A substantial portion of the sub-leases relate to restructuring lease obligations and are reflected in consolidation and integration charges as further described in Notes 1 and 10. |
Rent expense for continuing operations (excluding consolidation and integration charges) incurred under operating leases was $32.1 million, $30.9 million, and $29.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. Rent expense does not necessarily reflect cash payments, as further described under “Operating Leases” in Note 1.
F-20
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Capital Leases
CBIZ leases furniture and fixtures for certain office facilities under various capital lease agreements. Property acquired under capital lease agreements and recorded as property and equipment, net in the consolidated balance sheets at December 31, 2005 and 2004 was as follows (in thousands):
| | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| Furniture and fixtures | | $ | 2,715 | | | $ | 2,031 | |
| Accumulated depreciation | | | (588 | ) | | | (321 | ) |
| | | | | | | |
| | Furniture and fixtures, net | | $ | 2,127 | | | $ | 1,710 | |
| | | | | | | |
Depreciation of equipment acquired under capital lease agreements is recorded as depreciation and amortization expense in the consolidated statements of financial condition.
At December 31, 2005 and 2004, current capital lease obligations totaled $0.6 million and $0.4 million and non-current capital lease obligations totaled $1.0 million and $1.2 million, respectively. These obligations are recorded as other current and other non-current liabilities in the accompanying consolidated balance sheets, as appropriate. Future minimum lease payments under capital leases and the present value of such payments at December 31, 2005 were as follows (in thousands):
| | | | | | |
| Years ended December 31, | | |
| | | |
| 2006 | | $ | 706 | |
| 2007 | | | 577 | |
| 2008 | | | 467 | |
| 2009 | | | 91 | |
| 2010 | | | — | |
| Thereafter | | | — | |
| | | | |
| Total minimum lease payments | | | 1,841 | |
| Less imputed interest | | | (192 | ) |
| | | | |
| | Present value of minimum lease payments | | $ | 1,649 | |
| | | | |
| |
| 9. | Commitments and Contingencies |
Acquisitions
The purchase price that CBIZ pays for businesses and client lists generally consist of two components: an up-front non-contingent portion, and a portion which is contingent upon the acquired businesses or client lists actual future performance. Non-contingent purchase price is recorded at the date of acquisition and contingent purchase price is recorded as it is earned. Acquisitions are further disclosed in Note 17.
Indemnifications
CBIZ has various agreements in which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations, warranties, covenants or agreements, related to matters such as title to assets sold and certain tax matters. Payment by CBIZ under such indemnification clauses are generally conditioned upon the other party making a claim. Such claims are typically subject to challenge by CBIZ and to dispute resolution procedures specified in the particular contract. Further, CBIZ’s obligations under these agreements may be limited in terms of time and/or amount and, in some instances, CBIZ may have recourse against third parties for certain payments made by CBIZ. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of CBIZ’s obligations and the unique facts of each particular agreement. Historically, CBIZ has not made any payments under these agreements that have been
F-21
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
material individually or in the aggregate. As of December 31, 2005, CBIZ was not aware of any obligations arising under indemnification agreements that would require material payments.
Employment Agreements
CBIZ maintains severance and employment agreements with certain of its executive officers, whereby such officers may be entitled to payment in the event of termination of their employment. CBIZ also has arrangements with certain non-executive employees which may include severance and other employment provisions. CBIZ accrues for amounts payable under these contracts and arrangements as triggering events occur and obligations become known. During the years ended December 31, 2005, 2004 and 2003, payments regarding such contracts and arrangements have not been material.
Letters of Credit and Guarantees
CBIZ provides letters of credit to certain lessorslandlords (lessors) of its leased premises in lieu of cash security deposits. Lettersdeposits, which totaled $2.0 million and $2.9 million at December 31, 2005 and 2004, respectively. In addition, CBIZ provides bonds to various state agencies to meet certain licensing requirements. The amount of bonds outstanding at December 31, 2005 and 2004 was $1.2 million and $1.6 million, respectively.
CBIZ acted as guarantor on various letters of credit
under the credit
facility were $1.9for a CPA firm with which it has an affiliation, which totaled $2.4 million and
$1.5$1.3 million
as ofat December 31,
2002,2005 and
2001,2004, respectively.
Management does not believes it is practicable to estimateIn accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, as amended, CBIZ has recognized a liability for the fair value of
the obligations undertaken in issuing these
financial instruments, andguarantees, which is recorded as other current liabilities in the accompanying consolidated balance sheets. Management does not expect any material
losseschanges to result from these instruments
becauseas performance
under the guarantees is not expected to be required.
At December 31, 2002, based on the borrowing base calculation, CBIZ had
approximately $36.0 million of available funds under its credit facility.
Management believes that the carrying amount of bank debt recorded at December
31, 2002 approximate its fair value.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
CBIZ leases certain of its premises and equipment under various operating
lease agreements. At December 31, 2002, future minimum rental commitments
becoming payable under all operating leases are as follows (in thousands):
YEARS ENDING DECEMBER 31,
- -------------------------
2003........................................................ $ 22,318
2004........................................................ 19,480
2005........................................................ 15,316
2006........................................................ 13,863
2007........................................................ 12,610
Thereafter.................................................. 62,836
--------
$146,423
========
F-15
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Total rental expense incurred under operating leases was $28.5 million,
$29.2 million, and $26.3 million in 2002, 2001, and 2000, respectively.
Legal Proceedings
Since September 1999, seven purported stockholder class-action lawsuits
were filed against CBIZ and certain of its current and former directors and
officers, and 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 adequately to 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 these lawsuits 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
| |
| 10. | Consolidation and Integration Reserve |
Consolidation and integration charges are comprised of 1999, CBIZ's Board of
Directors approved a planexpenses associated with CBIZ’s on-going efforts to consolidate several operations and locations in multi-officefragmented markets to promote and strengthen cross-serving between various practice groups. These expenses result from individual actions in several markets and integrate certain back-office functions into a shared-services
center. The planare not part of one company-wide program.
Consolidation and integration charges include costs for moving facilities, non-cancelable lease obligations, adjustments to lease accruals based on changes in sublease assumptions, severance obligations, and other related expenses. Significant consolidation and integration initiatives during 2005 included the consolidation of approximately 60 locations,offices in the elimination of more than 200 positions,Denver market and the divestiturecontinuation of four non-core
businesses. Pursuant toconsolidation activities in the plan, CBIZ recorded aChicago market, resulting in $0.5 million and $1.3 million in consolidation and integration pre-tax chargecharges during the twelve months ended December 31, 2005, respectively. During 2004, CBIZ incurred consolidation and integration charges of $27.4approximately $1.0 million related to real estate leasing costs in December 1999.the Chicago market. Other consolidation and integration initiatives during 2004 were individually insignificant. During 2000, CBIZ's Board2003, CBIZ initiated the consolidation of Directors approved a revision to the 1999 Plan
as a result of management changesoffices in Orange County, California, and certain other strategic changes, and
extended the timing of certain office consolidations beyond one year
Accordingly, CBIZ reduced approximately $8.4Cleveland, Ohio, which resulted in $0.5 million of accruals originally
providedcosts for in the plan related to several noncancellablenon-cancelable lease obligations and severance
obligations.moving expenses. In addition, CBIZ completed the planned consolidation of locations
in Atlanta, Dallas, Orlando, and Phoenix.
During 2001, CBIZ reduced the 1999 Plan by $0.5 million related to
non-cancelable lease obligations, with the postponement of planned
consolidations in the San Jose and St. Louis markets.
During 2002, CBIZ further reduced its 1999 Plan by $0.1 million resulting
from the buyout of one of its noncancellable lease obligations in the Atlanta
market.
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
client conveniently, and to promote cross-serving between various service
groups. CBIZ has initiated the consolidation in some of these markets and has
incurred expenses related to noncancellable lease obligations, severance
obligations, and expense-reduction initiatives. During 2002, CBIZ initiated
plans for the consolidation of the Kansas City market, which resultedwas initiated in $1.7
million of cost related to two noncancellable lease obligations. In addition,
2002.
F-22
CBIZ, continued its consolidations in the Philadelphia and
F-16
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Columbia markets. During 2000 and 2001, expenses were incurred related to
consolidations in the Los Angeles, Chicago, Philadelphia, Phoenix, Cleveland,
Southern California, and Columbia, Maryland markets.
— (Continued)
Consolidation and integration reserve balances as ofat December 31, 2002,
20012005, 2004 and 2000,2003, and activity during the twelve-month periodsyears ended December 31, 20012005 and 20002004 were as follows (in thousands):
| | | | | |
| | | Consolidation and | |
| | | Integration Reserve | |
| | | | |
| Reserve balance at December 31, 2003 | | $ | 4,857 | |
| Adjustments against income(1) | | | 2,502 | |
| Payments(2) | | | (3,949 | ) |
| | | | |
| Reserve balance at December 31, 2004 | | | 3,410 | |
| Adjustments against income(1) | | | 3,598 | |
| Payments(2) | | | (3,905 | ) |
| | | | |
| Reserve balance at December 31, 2005 | | $ | 3,103 | |
| | | | |
1999 PLAN OTHER PLANS
--------------------------- -------------
LEASE SEVERANCE & LEASE
CONSOLIDATION BENEFITS CONSOLIDATION
------------- ----------- -------------
Reserve balance at December 31, 2000............ $ 2,843 $ 449 $ 2,385
Amounts charged to | |
| (1) | Adjustments against income (1)................. -- -- 940
Reserve estimate adjustments to income........ (495) (234) --
Payments...................................... (1,251) (215) (1,030)
------- ----- -------
Reserve balance at December 31, 2001............ 1,097 -- 2,295
Amounts charged to income (1)................. -- -- 1,770
Reserve estimate adjustments to income........ (109) -- 742
Payments...................................... (924) -- (1,102)
------- ----- -------
Reserve balance at December 31, 2002............ $ 64 $ -- $ 3,705
======= ===== =======
are included in operating expenses in the accompanying consolidated statements of operations. |
|
| (2) | Payments are net of sub-lease payments received. |
- ---------------
(1) Amounts adjusted to income are included in operating expense and corporate
general and administrative expense in the accompanying consolidated
statement of operations for the twelve-month periods then ended. See the
table below for the respective amounts recorded in each line item.
Consolidation and integration charges incurred forduring the years ended December 31, 2002, 20012005, 2004 and 20002003, and recorded as operating expenses in the accompanying consolidated statements of operations were as follows ($ in(in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Severance expense | | $ | 93 | | | $ | — | | | $ | 293 | |
| Lease consolidation and abandonment | | | 3,598 | | | | 2,502 | | | | 1,086 | |
| Other consolidation charges | | | — | | | | 248 | | | | 506 | |
| | | | | | | | | | |
| Total consolidation and integration charges | | $ | 3,691 | | | $ | 2,750 | | | $ | 1,885 | |
| | | | | | | | | | |
2002 2001 2000
--------- --------------------- -------------------------------
CORPORATE CORPORATE
OPERATING OPERATING G&A OPERATING G&A LOSS ON
EXPENSE EXPENSE EXPENSE EXPENSE EXPENSE SALE
--------- --------- --------- --------- --------- -------
CONSOLIDATION AND INTEGRATION
CHARGES NOT IN 1999 PLAN:
Severance expense................. $ 43 $ 296 $ 185 $ 1,767 $ 3,255 $ --
Lease consolidation and
abandonment..................... 3,290 1,231 -- 3,214 64 --
Other consolidation charges....... 650 1,052 -- -- -- --
Shares service and
consolidation................... -- -- -- 963 626 --
Write-down of non-core
businesses...................... -- -- -- 449 -- 566
------ ------ ----- ------- ------- ----
Subtotal.......................... 3,983 2,579 185 6,393 3,945 566
CONSOLIDATION AND INTEGRATION
CHARGES FOR THE 1999 PLAN:
Adjustment to lease accrual....... (109) (495) -- (5,901) -- --
Adjustment to severance accrual... -- (127) (107) (64) (2,381) --
------ ------ ----- ------- ------- ----
Total consolidation and
integration charges............. $3,874 $1,957 $ 78 $ 428 $ 1,564 $566
====== ====== ===== ======= ======= ====
| |
| 11. | Employee Benefits |
F-17
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. EMPLOYEE BENEFITS
Employee Savings Plan
CBIZ has employee savings plans coveringsponsors a qualified 401(k) defined contribution plan that covers substantially all of its employees. Participating employees may elect to contribute, on a tax-deferred basis, a portionup to 80% of their pre-tax annual compensation in accordance with(subject to a maximum permissible contribution under Section 401(k) of the Internal Revenue Code.Code). Matching contributions by CBIZ are 50% of the first 6% of base compensation that the participant contributes, and additional amounts may be contributed at the discretion of the Board of Directors. Participants may elect to invest their contributions in various funds, including: stock; fixed income; stable value; and balanced – lifecycle funds. Employer contributions (net of forfeitures) made to the plans in 2002, 2001plan during the years ended December 31, 2005, 2004 and 2000, amounted to2003, were approximately $5.3 million, $5.0 million, $5.2 million, and $5.6$5.1 million, respectively.
Two acquisitions made in 1998
Deferred Compensation Plan
CBIZ implemented a deferred compensation plan during the first quarter of 2004, under which certain members of management and 1999 had employee stock option plans
(ESOP) which were subsequently frozenother highly compensated employees may elect to defer receipt of a portion of their annual compensation, subject to maximum and minimum percentage limitations. The amount of compensation deferred under the plan is credited to each participant’s deferral account and a deferred compensation plan obligation is established by CBIZ. An amount equaling each participant’s compensation deferral is transferred into a rabbi trust and invested in various debt and equity securities as directed by the participants. The ESOP related to the 1999
acquisition was terminated in 2000, and as required under the Statement of
Position No. 93-6, the difference between the costassets of the remaining unearned
ESOP sharesrabbi trust are held by CBIZ and recorded as assets of deferred compensation plan in the accompanying consolidated balance sheets.
F-23
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets of the deferred compensation plan consist primarily of investments in mutual funds, money market funds and equity securities. The values of these investments are based on published market quotes at the end of the period. Adjustments to the fair value of those sharesthese investments are recorded as other income (expense), offset by adjustments to compensation expense in the consolidated statements of operations, and were approximately $1.8$0.6 million has
been chargedand $0.4 million for the years ended December 31, 2005 and 2004, respectively. These investments are specifically designated as available to additional paid-in capitalCBIZ solely for the purpose of paying benefits under the deferred compensation plan. However, in the event that CBIZ became insolvent, the investments would be available to all unsecured general creditors.
The deferred compensation plan obligation represents amounts due to participants of the plan, and consist of accumulated participant deferrals and earnings thereon since the inception of the plan, net of withdrawals. This liability is an unsecured general obligation of CBIZ, and is recorded as deferred compensation plan obligations in the accompanying consolidated statements of stockholders' equity.
12. COMMON STOCK
CBIZ'sbalance sheets.
CBIZ’s authorized common stock consists of 250,000,000250 million shares of common stock, par value $0.01 per share (Common Stock). The holders of CBIZ's common
stockCBIZ’s Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. There are no cumulative voting rights with respect to the election of directors. Accordingly, the holder or holders of a majority of the outstanding shares of Common Stock will be able to elect the directors of CBIZ 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 share ratably in the net assets of CBIZ remaining after the payment of any and all creditors. The outstanding shares of Common Stock are duly authorized, validly issued, fully paid and non-assessable. The transfer agent and registrar for the Common Stock is Fifth Third Bank, N.A.
Computershare Investor Services, LLC.
CBIZ completes registration filings related to its Common Stock to register shares under the Securities Act of 1933. To date, CBIZ has registeredfiled an effective registration statement with the following sharesSEC to register the sale of Common Stock for the following purposes: (i) approximately
sixup to 15 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 common 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) 15,000,000 shares of our Common Stock, all of which remain available tothat may be offered from time to time in connection with acquisitions under our acquisition
shelf registration statement.
acquisitions.
Treasury Stock
In February 1999, CBIZ issued 1,800,000 restricted shares of common stock
and 900,000 warrants to an outside party for a $25 million equity investment in
CBIZ. Fifty percent of the common stock is subject to a one-year lock-up
restriction, while the remaining common stock is subject to a two-year lock-up
restriction, and warrants to purchase shares of common stock 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.
TREASURY STOCK
In August 2001, CBIZ's2005, CBIZ’s Board of Directors authorized the implementationshare repurchase of up to 5.0 million shares of CBIZ common stock. During the year ended December 31, 2005, CBIZ repurchased approximately 3.8 million shares of its common stock in the open market, at an aggregate purchase price of approximately $16.7 million. The repurchase plan expired December 31, 2005.
In March 2004, CBIZ’s Board of Directors authorized share repurchases of up to 8.5 million shares of CBIZ common stock. A supplement to the plan was approved by the Board of Directors in May 2004, authorizing CBIZ to purchase an additional 2.0 million shares of CBIZ common stock, for a total of 10.5 million shares. In April 2004, CBIZ completed a tender offer that resulted in the purchase of approximately 7.5 million shares of CBIZ common stock at a purchase price of $5.00 per share, or a total cost (including legal and other direct expenses) of approximately $37.8 million. During the year ended December 31, 2004, CBIZ also repurchased approximately 2.9 million shares of its common stock in the open market, at an aggregate purchase price of approximately $12.6 million. The repurchase plan expired December 31, 2004.
In June 2003, CBIZ’s Board of Directors authorized a share repurchase plan. The initial plan authorizedof up to 15.0 million shares of CBIZ common stock (not to exceed $52.5 million). In July 2003, CBIZ completed a modified Dutch Auction tender offer which resulted in the purchase of up to oneapproximately 10.0 million shares of CBIZ'sCBIZ common stock overat a purchase price of $3.30 per share, or a total cost (including legal and other direct expenses) of approximately $33.2 million. During the first six monthsyear ended December 31, 2003, CBIZ also repurchased 104,000 shares of the plan. In
accordance with the plan, its common
F-24
CBIZ, purchases shares thoughINC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
stock in the open market, at an aggregate purchase price of approximately $0.4 million. The repurchase plan expired December 31, 2003.
Repurchased shares are held in treasury, and
can
privately negotiate purchases and reserve themmay be reserved for
possiblefuture use
in the future in connection with acquisitions,
the employee
stock investment planshare plans and other general purposes. The repurchase
program doesplans allow CBIZ to purchase shares through the open market or through privately negotiated purchases. The repurchase programs do not obligate CBIZ to acquire any specific number of shares and may be suspended at any time.
As of December 31,
2002, CBIZ had repurchased 170,000 shares at a cost of $0.4 million.
F-18
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As part of the new bank credit agreement obtained in September 2002,During 2005, repurchases arewere subject to annual dollar and financial ratio limitations based on net income.under the credit facility. At December 31, 2002,2005, CBIZ isbelieves it was in compliance with this covenant.
EMPLOYEE STOCK INVESTMENT PLAN
Employee Stock Investment Plan
Effective June 1, 2001, CBIZ established the Employee Stock Investment Plan which provides CBIZ employees with a method of purchasing shares of CBIZ'sCBIZ’s common stock, $.01 par value per share.stock. Participation in the plan is open to all CBIZ employees whose payroll is processed by the designated CBIZ payroll provider. CBIZ assumes all administrative expenses for the plan, and pays all opening and transaction charges related to the enrollment and purchase of stock, other than those duefees that participants are required to pay upon the sale of the shares. CBIZ does not provide a discount to employees for the purchase of CBIZ common stock.
Participants may also purchase shares of CBIZ Stockstock by making optional cash investments in accordance with the provisions of the Plan.plan. Shares of CBIZ Stockstock purchased by participants in the Planplan may be treasury or new issue stock, or at CBIZ'sCBIZ’s option, CBIZ Stockstock 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 Stockstock purchased in the open market or in negotiated transactions is the weighted average price at which the shares are actually purchased.
WARRANTS
In connection with
Stock Options
CBIZ’s outstanding stock options have been granted pursuant to two plans: The 1996 Employee Stock Option Plan, and the
spin off2002 Stock Incentive Plan. The 2002 Stock Incentive Plan is an amendment and restatement of the
hazardous waste operations
(including CBIZ's predecessor company) to1996 Employee Stock Option Plan. Under the
stockholders2002 Stock Incentive Plan, a maximum of
Republic
Industries, Inc. (the "RESI Transaction") in 1996, RESI agreed to issue to
holders of unexpired warrants of its former parent, additional RESI warrants to
acquire15.0 million stock options, restricted stock or other stock based compensation awards may be awarded, which number shall include those 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 warrantsthat are
designated as stapled warrants and expired at various dates through December
2000. Prior to the expiration of such warrants, the holders of these warrants
were able to exerciseavailable for grant under the
original terms of the warrants and receive CBIZ
stock.
In addition to warrants issued through the RESI Transaction, CBIZ also
issued warrants in connection with private placements completed in October 1996,
December 1996, and April 1997, and granted warrants in connection with certain
acquisitions made during 1997. Portions of the warrants issued in connection
with 1997 acquisitions 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 issued in connection with 1997
acquisitions 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 forgoing
demand registration rights. In December 1999, the Board of Directors extended
the expiration dates of certain warrants outstanding from the December 1996 and
April 1997 private placements through June 2000. As consideration for the
extension of the term, the holders of the warrants will pay the original
exercise price, plus a premium for each month from the original expiration date
to the exercise date, upon exercise of the warrants.
F-19
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Information relating to warrants to purchase common stock is summarized
below (in thousands):
2002 2001 2000
------ ------ ------
Outstanding at beginning of year............................ 1,800 6,170 10,012
Granted /issued............................................. -- -- --
Expired/cancelled........................................... (1,200) (4,370) (3,786)
Exercised................................................... -- -- (56)
------ ------ ------
Outstanding at end of year (a).............................. 600 1,800 6,170
====== ====== ======
Exercisable at end of year.................................. 600 1,800 6,170
====== ====== ======
- ---------------
(a) 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. Exercise prices for warrants outstanding
at December 31, 2000 ranged from $3.875 to $30.00.
STOCK OPTIONSprior plan. Under the 1997 Agents1996 Employee Stock Option Plan a maximum of 1,200,00015.0 million shares were available to be awarded. Stock 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 earlierawarded under
certain conditions, including termination of the agency agreement.
Under the 2002 Employee Stock Option Plan (formerly the 1996 Employee Stock Option Plan), a maximum of 15,000,000 options may be awarded.Plan and The options
awarded2002 Stock Incentive Plan, are generally 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,At the discretion of the Compensation Committee of the Board of Directors, options awarded under the 1996plans may vest immediately or in a time period shorter than five years. Under each of the plans, stock options awarded to non-employee directors have generally been granted with immediate vesting. In addition, certain members of executive management have been granted stock options with vesting terms of shorter than five years.
Stock options may be granted alone or in addition to other awards and may be of two types: incentive stock options and nonqualified stock options. 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.
Total shares available for future grant under the plan 250,000were approximately 5.3 million, 5.3 million and 4.4 million at December 31, 2005, 2004 and 2003, respectively.
F-25
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock option activity during the years ended December 31, 2005, 2004 and 2003 was as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| | | | | Weighted | | | | | Weighted | | | | | Weighted | |
| | | | | Average | | | | | Average | | | | | Average | |
| | | Number | | | Exercise | | | Number | | | Exercise | | | Number | | | Exercise | |
| | | of | | | Price Per | | | of | | | Price Per | | | of | | | Price Per | |
| | | Options | | | Share | | | Options | | | Share | | | Options | | | Share | |
| | | | | | | | | | | | | | | | | | | |
| Outstanding at beginning of year | | | 8,523 | | | $ | 3.32 | | | | 10,155 | | | $ | 4.58 | | | | 10,952 | | | $ | 4.81 | |
| Granted | | | 468 | | | $ | 3.45 | | | | 473 | | | $ | 4.31 | | | | 558 | | | $ | 3.12 | |
| Exercised | | | (1,658 | ) | | $ | 2.52 | | | | (519 | ) | | $ | 2.60 | | | | (375 | ) | | $ | 2.47 | |
| Expired or canceled | | | (530 | ) | | $ | 13.36 | | | | (1,586 | ) | | $ | 11.98 | | | | (980 | ) | | $ | 7.19 | |
| | | | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 6,803 | | | $ | 2.72 | | | | 8,523 | | | $ | 3.32 | | | | 10,155 | | | $ | 4.58 | |
| | | | | | | | | | | | | | | | | | | |
| Exercisable at end of year | | | 4,551 | | | $ | 2.47 | | | | 5,390 | | | $ | 3.46 | | | | 5,764 | | | $ | 5.64 | |
| | | | | | | | | | | | | | | | | | | |
The table below provides information about stock options outstanding and exercisable at December 31, 2005 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | | |
| | | | | Weighted | | | Weighted | | | | | Weighted | |
| | | | | Average | | | Average | | | | | Average | |
| | | | | Remaining | | | Exercise | | | | | Exercise | |
| | | Number of | | | Contractual | | | Price Per | | | Number of | | | Price Per | |
| Range of Exercise Price | | Options | | | Life (Years) | | | Share | | | Options | | | Share | |
| | | | | | | | | | | | | | | | |
| $5.01 - $8.44 | | | 36 | | | | 0.0 | | | $ | 8.44 | | | | 36 | | | $ | 8.44 | |
| $3.00 - $5.00 | | | 3,698 | | | | 2.4 | | | $ | 3.56 | | | | 2,007 | | | $ | 3.50 | |
| $1.13 - $2.99 | | | 3,069 | | | | 1.4 | | | $ | 1.63 | | | | 2,508 | | | $ | 1.55 | |
| | | | | | | | | | | | | | | | |
| | Total | | | 6,803 | | | | 1.9 | | | $ | 2.72 | | | | 4,551 | | | $ | 2.47 | |
| | | | | | | | | | | | | | | | |
Restricted Stock Awards
Under the 2002 Stock Incentive Plan (described above), certain employees and non-employee directors were granted restricted stock awards. Restricted stock awards are independent of option grants, and are granted at no cost to non-employee directors. These options became exercisable immediately upon being
granted with a six-year expiration termthe recipients. The awards are subject to forfeiture if employment terminates prior to the release of restrictions, generally one to five years from the date of grant. PriorRecipients of restricted stock awards are entitled to the RESI Transaction, certain options were granted to employees,
directorssame dividend and affiliatesvoting rights as holders 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 Dateother CBIZ common stock and the RESI options granted with respect theretoawards are stapledconsidered to be issued and are only exercisable if exercised together. As a result of the sale
of RESI in July 1997, options under these plans became fully vested. These
options remain vested as long as the optionee is employed by the former parent,
RESI or their affiliates. The option price is based on the fair market value of
the common shares onoutstanding from the date of grant. Information relating toHowever, shares granted under the plan cannot be sold, pledged, transferred or assigned during the vesting period.
Restricted stock
option plans is summarized below (in
thousands):
2002 2001 2000
------ ------ ------
Outstanding at beginning of year............................ 9,652 7,858 5,394
Granted (a)................................................. 2,684 3,420 4,501
Exercised (b)............................................... (242) (34) --
Expired or canceled......................................... (1,142) (1,592) (2,037)
------ ------ ------
Outstanding at end of year (c).............................. 10,952 9,652 7,858
====== ====== ======
Exercisable at end of year (d).............................. 4,257 3,086 1,870
====== ====== ======
Available for future grant at the end of year............... 4,048 3,472 2,301
====== ====== ======
F-20
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- ---------------
(a) Options were granted at average prices of $3.44, $1.54 and $2.98 in 2002,
2001 and 2000, respectively.
(b) Options were exercised at a 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. No
options were exercised in 2000.
(c) Exercise prices for options outstanding ataward activity during the years ended December 31, 2002 ranged from
$1.08 to $17.752005 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. Exercise prices for options
outstanding at December 31, 2000 ranged from $1.08 to $17.75 and averaged
$8.17 with expiration dates ranging from May 2002 to December 2006.
(d) Exercise prices for options exercisable at December 31, 2002, 2001, and 2000
averaged $6.67, $8.50, and $11.59, respectively.
Had the cost of stock option plans been determined based on the fair value
of options at the grant date, CBIZ's net income (loss) and earnings (loss) per
share pro forma amounts would be2004 was as follows (amounts in(in thousands, except per share data): | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| | | | | Weighted | | | | | Weighted | |
| | | | | Average | | | | | Average | |
| | | Number | | | Price | | | Number | | | Price | |
| | | of | | | Per | | | of | | | Per | |
| | | Shares | | | Share(1) | | | Shares | | | Share(1) | |
| | | | | | | | | | | | | |
| Outstanding at beginning of year | | | 119 | | | $ | 4.35 | | | | — | | | | — | |
| Granted | | | 128 | | | $ | 3.56 | | | | 119 | | | $ | 4.35 | |
| Vested and released from restrictions | | | (11 | ) | | $ | 4.58 | | | | — | | | | — | |
| Forfeited | | | — | | | | — | | | | — | | | | | |
| | | | | | | | | | | | | |
| Outstanding at end of year | | | 236 | | | $ | 3.91 | | | | 119 | | | $ | 4.35 | |
| | | | | | | | | | | | | |
AS REPORTED PRO FORMA
--------------------- ---------------------
BASIC DILUTED BASIC DILUTED
--------- --------- --------- ---------
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)
========= ========= ========= =========
2000
Net income.............................. $(126,076) $(126,076) $(129,112) $(129,112)
========= ========= ========= =========
Net loss per share...................... $ (1.33) $ (1.33) $ (1.36) $ (1.36)
========= ========= ========= =========
| |
| (1) | Represents weighted average market value of the shares; awards are granted at no cost to the recipients. |
F-26
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The
above results may not be representative of the effects on net income
for future years.
CBIZ applied the Black-Scholes option-pricing model to determine the fairmarket value of
each option granted in 2002, 2001shares awarded during 2005 and
2000. Below2004 was $0.5 million and $0.5 million, respectively. This market value was recorded as unearned compensation and is
a summary ofbeing expensed ratably over the
assumptions used inperiods which the
calculation:
2002 2001 2000
----- ----- -----
Risk-free interest rate..................................... 2.89% 4.39% 4.98%
Expected volatility......................................... 75.76% 76.38% 62.80%
Expected option life (in years)............................. 3.75 3.75 3.75
13. EARNINGS PER SHARE
Forrestrictions lapse. Compensation expense recognized for restricted stock awards amounted to $0.2 million and $0.1 million during the years
presented, CBIZ presents bothended December 31, 2005 and 2004, respectively. Awards outstanding at December 31, 2005 will be released from restrictions at dates ranging from February 2006 through April 2010.The following table sets forth the computation of basic and diluted earnings per
share. The following data shows the amounts used in computing earnings (loss)
per share
and the effect on the weighted average number of shares of dilutive
potential common stock (amounts in(in thousands, except per share data)
. Included
in potential dilutive
F-21
CENTURY BUSINESS SERVICES,: | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
| Net income | | $ | 18,673 | | | $ | 16,051 | | | $ | 15,316 | |
| | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
| Basic weighted average common shares | | | 74,448 | | | | 79,217 | | | | 90,400 | |
| | | | | | | | | | |
Diluted | | | | | | | | | | | | |
| Options(1) | | | 2,169 | | | | 2,240 | | | | 2,362 | |
| Restricted stock awards | | | 52 | | | | 18 | | | | — | |
| Contingent shares(2) | | | 158 | | | | 2 | | | | — | |
| | | | | | | | | | |
| | Total diluted weighted average common shares | | | 76,827 | | | | 81,477 | | | | 92,762 | |
| | | | | | | | | | |
| Basic net income per share | | $ | 0.25 | | | $ | 0.20 | | | $ | 0.17 | |
| | | | | | | | | | |
| Diluted net income per share | | $ | 0.24 | | | $ | 0.20 | | | $ | 0.17 | |
| | | | | | | | | | |
| |
| (1) | For the years ended December 31, 2005, 2004 and 2003, a total of 36, 548 and 4,039 options, respectively, were excluded from the calculation of diluted earnings per share as their exercise price would render them anti-dilutive. |
|
| (2) | Contingent shares represent additional purchase price earned by businesses acquired by CBIZ, that will not be issued until future conditions have been met. See further discussion of acquisitions in Note 17. |
| |
| 15. | Supplemental Cash Flow Disclosures |
Cash paid (received) for interest and income taxes during the years ended December 31, 2005, 2004 and 2003 was as follows (in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Interest | | $ | 3,134 | | | $ | 1,342 | | | $ | 1,045 | |
| | | | | | | | | | |
| Income taxes | | $ | 6,112 | | | $ | 14,675 | | | $ | (2,262 | ) |
| | | | | | | | | | |
F-27
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
shares are contingent shares, which represent shares issued— (Continued)
Supplemental Disclosures of Non-Cash Investing and placed in escrow
that will not be released until certain performance goals have been met.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator
Net loss........................................... $(76,848) $(16,000) $(126,076)
Denominator:
Basic
Weighted average common shares.................. 94,810 94,818 94,674
Diluted
Options (a)................................... 2,182 -- --
-------- -------- ---------
Total...................................... 96,992 94,818 94,674
======== ======== =========
Basic EPS (a)........................................ $ (0.81) $ (0.17) $ (1.33)
======== ======== =========
Diluted EPS (a)...................................... $ (0.79) $ (0.17) $ (1.33)
======== ======== =========
- ---------------
(a) The effect ofFinancing Activities Non-cash investing and financing activities during the incremental sharesyears ended December 31, 2005, 2004 and 2003 were as follows (in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Property and equipment acquired under capital lease obligations | | $ | 407 | | | $ | 1,857 | | | $ | — | |
| | | | | | | | | | |
| Business acquisitions, including contingent consideration earned | | $ | 3,712 | | | $ | 2,033 | | | $ | 4,036 | |
| | | | | | | | | | |
| Non-cash proceeds from divested operations | | $ | 201 | | | $ | 1,865 | | | $ | 207 | |
| | | | | | | | | | |
| Non-cash proceeds from discontinued operations | | $ | 4,569 | | | $ | 530 | | | $ | 494 | |
| | | | | | | | | | |
Non-cash consideration paid for business acquisitions and proceeds received from warrants, options, and contingent
shares of 1,624 and 325 in 2001, and 2000, respectively, have been excluded
from diluted weighted average shares, as the net loss for the period would
cause the incremental shares to be anti-dilutive.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
During 2002, CBIZ received consideration for divestitures of $4.2 milliondivested operations were generally in the form of notes receivable, in lieu of cash. In addition,notes payable and 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.
During 2000, CBIZ reduced approximately $8.4 million of accruals for
non-cancelable lease obligations and severance obligations due to changes in the
consolidation and integration plan.
CASH PAID (RECEIVED) DURING THE YEAR FOR (IN THOUSANDS):
common stock.
2002 2001 2000
------ ------- -------
Interest.................................................. $2,521 $ 6,916 $12,156
====== ======= =======
Income taxes.............................................. $4,323 $(8,982) $ 2,540
====== ======= =======
| |
| 16. | Related Parties |
15. RELATED PARTIES
The following is a summary of certain agreements and transactions between or among CBIZ and certain related parties. It is CBIZ'sCBIZ’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'sCBIZ’s experience and the terms of its transactions with unaffiliated parties, it is the Audit Committee of the Board of Directors'Directors’ and managements’ belief that the transactions described below met these standards at the time of the transactions.
A number of the businesses acquired
since October 1996by CBIZ are located in properties owned indirectly by and leased from persons employed by CBIZ. In the aggregate, CBIZ paid approximately
$0.8$1.3 million,
$1.5$1.3 million,
F-22
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
and $1.5$1.4 million for the years ended 2002, 20012005, 2004 and 2000,2003, respectively, under such leases which management believes were at market rates.Rick L. Burdick, a director and Vice Chairman of CBIZ, is a partner of Akin Gump Strauss Hauer & Feld L.L.P.LLP (Akin, Gump.)Gump). Akin, Gump performed legal work for CBIZ during 2002, 20012005, 2004 and 20002003 for which the firm received $119,064, $68,540approximately $0.1 million, $0.2 million, and $116,000$0.2 million from CBIZ, respectively.
CBIZ maintain 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. The majority of the partners in the
independent CPA firms maintaining administrative service agreements with CBIZ
are CBIZ employees.
Robert A. O'Byrne,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. 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 bothwas in existence at the time CBIZ acquired the former company, of which Mr. O'ByrneO’Byrne was an owner. The partnership received approximately $0.3 million, $0.3 million, and $0.4 million from CBIZ, during the years ended December 31, 2005, 2004 and 2003, respectively.
CBIZ maintains joint-referral relationships and administrative service agreements with independent licensed CPA firms under which CBIZ provides administrative services in exchange for a fee. These firms are owned by licensed CPAs who are employed by CBIZ subsidiaries, and provide audit and attest services to clients including CBIZ’s clients. The CPA firms with which CBIZ maintains service agreements operate as limited liability companies, limited liability partnerships or professional corporations. The firms are separate legal entities with separate governing bodies and officers. CBIZ has divested several operations during 2002no ownership interest in any of these CPA firms, and 2001,neither the existence of the administrative service agreements 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 each of its respective services, and CBIZ does not believe that its arrangements with these CPA firms result in additional risk of loss.
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
F-28
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of Variable Interest Entities”, as amended. The impact to CBIZ of this accounting pronouncement is discussed in the Note 1.
CBIZ acted as guarantor for letters of credit for a CPA firm with which it has an affiliation. The letters of credit total $2.4 million and $1.3 million as of December 31, 2005, and December 31, 2004, respectively. In accordance with FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and its amendments, CBIZ has recognized a liability for the fair value of the obligations undertaken in issuing these guarantees, which is recorded as other current liabilities in the accompanying consolidated financial statements. Management does not expect any material changes to result from these instruments as performance is not expected to be required.
In 2003, CBIZ executed a note receivable with a CPA firm whose partner group has since joined MHM P.C., a CPA firm with which CBIZ maintains an administrative services agreement. The balance on the note at December 31, 2005 and 2004 was approximately $0.1 million and $0.2 million, respectively.
In an effort to rationalize the business, and sharpenCBIZ has divested of several operations that were underperforming, located in secondary markets or did not provide the focus on non-strategic businesses.level of synergistic cross-serving opportunities with other CBIZ businesses that is desired. In accordance with this strategy, CBIZ has sold and may sell in the future businesses to former employees or shareholders. Management believes thesethat past transactions were priced at market rates, competitively bid, and entered into at arm'sarm’s length terms and conditions.
16. ACQUISITIONS
In October 2002,
During the year ended December 31, 2005, CBIZ acquired three business operations consisting of: a registered investment firm in Cleveland, Ohio which complements the B&I practice; an accounting and consulting practice in San Diego, California; and a valuation business in Milwaukee, Wisconsin which is reported as part of the National Practices – Other segment. In addition, CBIZ acquired the client lists of an accounting and consulting practice in Philadelphia, Pennsylvania and of a Benefits and Insurance practice in Charlotte, North Carolina. Aggregate consideration for the acquisitions consisted of approximately $6.6 million cash, $0.4 million in notes and approximately 45,000 shares of restricted common stock (estimated stock value of $0.2 million at acquisition) paid at closing, and up to an additional $13.2 million (payable in cash and stock) which is contingent on the businesses meeting certain future revenue or earnings targets.
During the year ended December 31, 2004, CBIZ completed acquisitions of benefits and insurance firms in Chicago, Illinois, and Owing Mills, Maryland, as well as an accounting tax and advisory firm located in Calverton, Maryland. Denver, Colorado, and a technology firm in Cleveland, Ohio which is reported as part of the National Practices – Other segment. Aggregate consideration for the acquisitions consisted of approximately $3.7 million cash and approximately 215,500 shares of restricted common stock (estimated stock value of $1.0 million at acquisition) paid at closing, and up to an additional $8.0 million (payable in cash and stock) which is contingent on the businesses meeting certain future revenue and earnings targets.
In addition to the businesses acquired during 2004, CBIZ purchased three client lists which complement the National Practices – Other segment. The purchase price for these client lists is primarily dependent upon future results, and is not expected to be material individually or in the aggregate.
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 and 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.
F-29
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The operating results of this firmthese firms have been included in the accompanying consolidated financial statements since the datedates of acquisition. Pro forma information has not been provided as the acquisition. The aggregate purchase priceimpact was not material to the financial condition, results of this acquisition was approximately
$4.1 million in cash.operations or cash flows of CBIZ. Client lists and non-compete agreements were recorded at fair value at the time of acquisition. The excess of purchase price over the fair value of the net assets acquired, (including client lists and non-compete agreements) was allocated to goodwill. Additions to goodwill, client lists and other intangible assets resulting from acquisitions and contingent consideration earned during the twelve months ended December 31, 2005 and 2004 were as follows: (i) goodwillfollows (in thousands):
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| Goodwill | | $ | 9,095 | | | $ | 2,619 | |
| | | | | | | |
| Client lists | | $ | 5,817 | | | $ | 5,111 | |
| | | | | | | |
| Other intangible assets | | $ | 597 | | | $ | 307 | |
| | | | | | | |
| |
| 18. | Discontinued Operations and Divestitures |
From time to time, CBIZ will divest (through sale or closure) business operations that are underperforming, located in secondary markets, or do not provide the level of $2.0 million, (ii) purchased
client listsynergistic cross-serving opportunities with other CBIZ businesses that is desired. Divestitures are classified as discontinued operations provided they meet the criteria as provided in SFAS 144, “Accounting for the Impairment or Disposal of $2.6 million,Long-Lived Assets” and (iii) a lease obligationEITF No. 03-13, “Applying the Conditions in Paragraph 42 of $0.5 million
expiringFASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets in January 2006. The purchased client list is being amortized over a
ten-year period.
In May 2001,Determining Whether to Report Discontinued Operations.”
During 2005, CBIZ acquired oneclosed an operation from the Accounting, Tax and Advisory Services firm
which was accountedpractice group, sold an operation from the Benefits and Insurance practice group, and committed to the divestiture of a business unit in the National Practices – Other practice group. These operations qualified for under the purchase method of accounting. Accordingly,
the operating results of the acquired company have been includedtreatment as discontinued operations and are classified as such in the accompanying consolidated financial statements sincestatements.
The Benefits and Insurance operation was sold for proceeds that consisted of: $2.0 million cash received at closing; $4.1 million due from others which is subject to adjustment based upon actual cash collected on accounts receivable that were sold; and contingent proceeds which are determined based upon the datedivested operation’s actual future performance. Contingent proceeds are recorded as gain on sale of discontinued operations as they are earned, and totaled $4.6 million (pretax) during the acquisition. The aggregate purchase pricefourth quarter and year ended December 31, 2005. Adjustments to the amount due from others are recorded to the operations of this acquisition was approximately
$0.3 million in cash. The excess of the purchase price over fair value of the
net assets acquired (goodwill) was approximately $0.1 million.
The pro forma revenue and results of operations for the acquisitions
completed in 2002, 2001 and 2000, had the acquisitions occurred at the beginning
of such fiscal years, are not significant, and accordingly, have not been
provided.
17. DIVESTITURESdiscontinued operations. During 2002,2005, CBIZ sold, closed, oralso committed to sale the divestiture of sixteen businesses. Fivea business unit in the National Practices – Other practice group. CBIZ plans to divest of these operationsthis business in two portions, one of which will be sold and the other which will be closed. The National Practices business operation will have been classifiedcontinuing cash flows in 2006, as discontinued operations, in connection with the adoptionbusiness will continue to operate until sale and closure are complete. CBIZ expects the closure to be completed by the third quarter of SFAS No. 144,
"Accounting for2006, and expects that the Impairment of orremaining portion will be sold before December 31, 2006.
CBIZ also sold two client lists during 2005, one each from the
Disposal of Long-Lived Assets," as
discussed in note 21. The remaining eleven operations were either initiated
before CBIZ's adoption of SFAS No. 144 or did not meet the criteria for
treatment as a discontinued operationAccounting, Tax 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,
F-23
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
one BenefitAdvisory and Benefits and Insurance operation,practice groups. These client lists were sold for aggregate proceeds of $0.1 million cash and two National Practice operations for an
aggregate price of $7.2 million which included $4.0$0.2 million in net notes receivables. These divestituresreceivable, and resulted in a pretax gain of $0.9$0.3 million. As these sales did not qualify for treatment as discontinued operations, the gains are reported as gain on sale of operations, net from continuing operations in the accompanying consolidated statement of operations. During fiscal 2001,2004, CBIZ completedsold or closed five business operations, consisting of four ATA operations, and an operation from the sale or closing of fifteen business
operations.National Practices – Other segment. In addition to the divestiture of these operations, CBIZ sold three client lists from the ATA practice group and a client list from the B&I practice group. Sales were made for aggregate proceeds of $4.6 million cash, $2.3 million in notes receivable and CBIZ stock valued at $0.1 million. Three of the divestitures qualified for treatment as discontinued operations and are classified as such in the accompanying consolidated financial statements. Operations that did not qualify for treatment as discontinued
F-30
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operations were sold for a pre-tax gain of $1.0 million, which is reported as gain on sale of operations, net from continuing operations.
During 2003, CBIZ sold or closed eight business operations consisting of four ATA operations, two Benefit and Insurance operations and two National Practice operations. CBIZ also recorded an additional chargesold four client lists and related toassets within the planned divestiture or closingATA practice group. These businesses and client lists were sold for aggregate proceeds of five additional business units to be completed
in 2002. The aggregate price of these divestitures was $16.5$7.2 million which
included $14.0cash, $0.2 million in cash, $2.4stock, $0.4 million in notes receivablesreceivable, and $0.1 million in CBIZ stock. In addition CBIZ also retained a $6.0 million contingent note.
These divestitures resultedother receivables. Six of the business operations satisfied the criteria for treatment as discontinued operations, and were classified as such in the accompanying financial statements. The two operations and client lists which did not qualify for treatment as discontinued operations were sold for a pretax lossgain of $7.1 million.
During fiscal 2000, $2.5 million, which is reported as gain on sale of operations, net from continuing operations.
CBIZ completedmay earn additional proceeds on the sale of threecertain client lists, which are contingent upon future revenue generated by the client lists. CBIZ records these proceeds as other income when they are earned.
For those business operations that qualified for treatment as discontinued operations, the net assets, liabilities and its franchiseresults of operations are reported separately in the accompanying consolidated financial statements. Revenue and loss from operations of discontinued operations for an aggregate pricethe years ended December 31, 2005, 2004, and 2003 were as follows (in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Revenue | | $ | 5,980 | | | $ | 18,531 | | | $ | 37,034 | |
| | | | | | | | | | |
| Loss from operations of discontinued operations before income tax benefit | | $ | (10,258 | ) | | $ | (8,202 | ) | | $ | (1,056 | ) |
| Income tax benefit | | | (3,795 | ) | | | (2,773 | ) | | | (331 | ) |
| | | | | | | | | | |
| Loss from operations of discontinued operations, net of tax | | $ | (6,463 | ) | | $ | (5,429 | ) | | $ | (725 | ) |
| | | | | | | | | | |
Gains on disposals of $1.2 million. In
addition, CBIZ recorded an additional charge of $27.2 million related to the
planned divestiture of two businessdiscontinued operations with estimated proceeds of $15.5
million, which were scheduled to be completed in 2001. These six divestitures
resulted in a pretax loss of $31.6 million.
18. CHANGE IN ACCOUNTING PRINCIPLE RELATED TO SAB 101
During the fourth quarter of 2000, CBIZ adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognized in
Financial Statements." SAB 101 summarizes certain of the Commission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In light of the guidance given by SAB 101 and the SEC's
"Frequently Asked Questions and Answers" bulletin released on October 12, 2000,
CBIZ changed certain revenue recognition policies effective January 1, 2000.
Due to this change, CBIZ recorded a cumulative adjustment in the first
quarter 2000 of $11.9 million (net of tax benefit of $7.9 million). The impact
in 2000 of adopting SAB 101 resulted in a reduction in revenue of approximately
$18.2 million, a reduction in operating expenses of approximately $11.4 million,
and an increase in pretax loss from continuing operations (before cumulative
effect of accounting change) of approximately $6.8 million. Prior to the
issuance of SAB 101, CBIZ recorded revenue in a manner consistent with generally
accepted accounting principles and industry practice. Based upon our review of
SAB 101, CBIZ elected to change its revenue recognition policies for the following items.
- Commissions revenue due from insurance carriers from single-premium
bank-owned life insurance policies (BOLI) are recorded based on the
amounts due at the time of sale, thereby eliminating a substantial
portion of commission receivableyears ended December 31 2005, 2004 and resulted in an increase in deferred
tax assets. Prior to SAB 101, CBIZ accrued for commission revenue from
BOLI products based on the estimated commission to be received over the
life of the insurance policy.
- Commission revenue contingent on meeting volume-based bonus levels are
recorded once the volume threshold has been met. Prior to SAB 101, CBIZ
accrued for such commission revenue periodically based on the probability
of meeting or exceeding the required threshold.
- Revenue related to CBIZ's medical practice management services are
recorded once payment is received for our client by the third-party
payor, thereby eliminating unbilled receivables and resulted in an
increase in deferred tax assets. Prior to SAB 101, CBIZ recognized
revenue2003 were as services were provided to the client.
- Commission revenue at certain wholesale insurance businesses is reported
net of sub-broker commissions, thereby reducing revenue and operating
expense proportionately. Prior to SAB 101, commission revenue recognized
at these units was reported on a "gross" basis. This change had no impact
on net income.
follows (in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| Gain on disposal of discontinued operations, before income tax expense(1) | | $ | 5,635 | | | $ | 398 | | | $ | 1,457 | |
| Income tax expense | | | 2,085 | | | | 266 | | | | 731 | |
| | | | | | | | | | |
| Gain on disposal of discontinued operations, net of tax | | $ | 3,550 | | | $ | 132 | | | $ | 726 | |
| | | | | | | | | | |
| |
| (1) | Includes contingent proceeds in the amount of $4,569, for the Benefits and Insurance operation that was sold in the third quarter of 2005. |
F-31
CBIZ, recognized $10.1 million of revenue in 2000 which was included as a
component of the cumulative effect of a change in accounting principle. During
2002 and 2001, CBIZ recognized $1.0 million of revenue.
F-24
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
— (Continued)
At December 31, 2005 and 2004, the assets and liabilities of business operations classified as discontinued operations consisted of the following (in thousands):
| | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
Assets: | | | | | | | | |
| Accounts receivable, net | | $ | 1,319 | | | $ | 10,747 | |
| Due from buyer | | | 1,513 | | | | — | |
| Funds held for clients | | | 3,392 | | | | 5,450 | |
| Property and equipment, net | | | 414 | | | | 1,872 | |
| Other assets | | | 92 | | | | 236 | |
| | | | | | | |
| | Assets of discontinued operations | | $ | 6,730 | | | $ | 18,305 | |
| | | | | | | |
Liabilities: | | | | | | | | |
| Accounts payable | | $ | 317 | | | $ | 1,090 | |
| Other liabilities | | | 2,166 | | | | 1,265 | |
| Client fund obligations | | | 3,392 | | | | 5,450 | |
| Deferred income tax liability, net | | | 64 | | | | 341 | |
| | | | | | | |
| | Liabilities of discontinued operations | | $ | 5,939 | | | $ | 8,146 | |
| | | | | | | |
F-32
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
fiscalthe years
2002, 2001ended December 31, 2005 and 2004 (in thousands, except per share amounts)
:
2002
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Revenues.............................. $142,204 $125,163 $116,090 $120,878
======== ======== ======== ========
Income (loss) from continuing
operations.......................... $ 10,084 $ 1,954 $ (4,153) $ (329)
======== ======== ======== ========
Net income (loss)..................... $(70,707) $ 1,136 $ (6,108) $ (1,169)
======== ======== ======== ========
Earnings (loss) per share:
Basic --
Continuing operations............ $ 0.10 $ 0.02 $ (0.04) $ (0.00)
======== ======== ======== ========
Net income (loss)................ $ (0.75) $ 0.01 $ (0.06) $ (0.01)
======== ======== ======== ========
Earnings (loss) per share:
Diluted --
Continuing operations............ $ 0.10 $ 0.02 $ (0.04) $ (0.00)
======== ======== ======== ========
Net income (loss)................ $ (0.73) $ 0.01 $ (0.06) $ (0.01)
======== ======== ======== ========
Basic shares.......................... 94,880 95,005 95,109 94,899
======== ======== ======== ========
Diluted shares........................ 97,112 97,595 95,109 94,899
======== ======== ======== ========
2001
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Revenues.............................. $158,622 $129,451 $116,838 $111,981
======== ======== ======== ========
Income (loss) from continuing
operations.......................... $ 9,252 $ 2,246 $ (7,557) $(17,158)
======== ======== ======== ========
Net income (loss)..................... $ 9,347 $ 1,964 $ (9,155) $(18,156)
======== ======== ======== ========
Earnings (loss) per share:
Basic --
Continuing operations............ $ 0.10 $ 0.02 $ (0.08) $ (0.18)
======== ======== ======== ========
Net income (loss)................ $ 0.10 $ 0.02 $ (0.10) $ (0.19)
======== ======== ======== ========
Earnings (loss) per share:
Diluted --
Continuing operations............ $ 0.10 $ 0.02 $ (0.08) $ (0.18)
======== ======== ======== ========
Net income (loss)................ $ 0.10 $ 0.02 $ (0.10) $ (0.19)
======== ======== ======== ========
Basic shares.......................... 94,825 94,903 94,919 94,754
======== ======== ======== ========
Diluted shares........................ 95,301 97,099 94,919 94,754
======== ======== ======== ========
F-25
CENTURY BUSINESS SERVICES,.| | | | | | | | | | | | | | | | | | | |
| | | 2005 | |
| | | | |
| | | March 31, | | | June 30, | | | September 30, | | | December 31, | |
| | | | | | | | | | | | | |
| Revenue | | $ | 154,229 | | | $ | 138,725 | | | $ | 134,214 | | | $ | 132,101 | |
| Operating expenses | | | 126,097 | | | | 120,295 | | | | 119,582 | | | | 119,321 | |
| | | | | | | | | | | | | |
| Gross margin | | | 28,132 | | | | 18,430 | | | | 14,632 | | | | 12,780 | |
| Corporate general and administrative | | | 6,421 | | | | 7,449 | | | | 6,364 | | | | 4,677 | |
| Depreciation and amortization | | | 3,900 | | | | 3,789 | | | | 3,765 | | | | 3,709 | |
| | | | | | | | | | | | | |
| Operating income | | | 17,811 | | | | 7,192 | | | | 4,503 | | | | 4,394 | |
| Other income (expense): | | | | | | | | | | | | | | | | |
| | Interest expense | | | (781 | ) | | | (845 | ) | | | (787 | ) | | | (696 | ) |
| | Gain on sale of operations, net | | | — | | | | — | | | | 29 | | | | 285 | |
| | Other income, net | | | 558 | | | | 999 | | | | 1,279 | | | | 2,216 | |
| | | | | | | | | | | | | |
| | | Total other income (expense), net | | | (223 | ) | | | 154 | | | | 521 | | | | 1,805 | |
| Income from continuing operations before income tax expense | | | 17,588 | | | | 7,346 | | | | 5,024 | | | | 6,199 | |
| Income tax expense | | | 7,282 | | | | 2,688 | | | | 2,151 | | | | 2,450 | |
| | | | | | | | | | | | | |
| Income from continuing operations | | | 10,306 | | | | 4,658 | | | | 2,873 | | | | 3,749 | |
| Loss from operations of discontinued operations, net of tax | | | (2,060 | ) | | | (1,332 | ) | | | (1,640 | ) | | | (1,431 | ) |
| Gain (loss) on disposal of discontinued operations, net of tax | | | (109 | ) | | | — | | | | 802 | | | | 2,857 | |
| | | | | | | | | | | | | |
| Net income | | $ | 8,137 | | | $ | 3,326 | | | $ | 2,035 | | | $ | 5,175 | |
| | | | | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.14 | | | $ | 0.06 | | | $ | 0.04 | | | $ | 0.05 | |
| | Discontinued operations | | | (0.03 | ) | | | (0.02 | ) | | | (0.01 | ) | | | 0.02 | |
| | | | | | | | | | | | | |
| | Net income | | $ | 0.11 | | | $ | 0.04 | | | $ | 0.03 | | | $ | 0.07 | |
| | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.13 | | | $ | 0.06 | | | $ | 0.04 | | | $ | 0.05 | |
| | Discontinued operations | | | (0.03 | ) | | | (0.02 | ) | | | (0.01 | ) | | | 0.02 | |
| | | | | | | | | | | | | |
| | Net income | | $ | 0.10 | | | $ | 0.04 | | | $ | 0.03 | | | $ | 0.07 | |
| | | | | | | | | | | | | |
| Basic weighted average common shares | | | 75,738 | | | | 75,175 | | | | 73,793 | | | | 73,123 | |
| | | | | | | | | | | | | |
| Diluted weighted average common shares | | | 77,718 | | | | 76,947 | | | | 75,988 | | | | 75,947 | |
| | | | | | | | | | | | | |
During the fourth quarter of 2005, CBIZ recorded a $4.6 million pre-tax gain on the disposal of discontinued operations ($2.9 million net of tax). The gain recorded in the fourth quarter represents contingent proceeds related to a benefits and insurance operation that was sold in the third quarter of 2005. Contingent proceeds are recorded as they are earned, and are determined based upon the actual performance of the business that was sold. Divestitures are further discussed in Note 18.
F-33
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
— (Continued)
| | | | | | | | | | | | | | | | | | | |
| | | 2004 | |
| | | | |
| | | March 31, | | | June 30, | | | September 30, | | | December 31, | |
| | | | | | | | | | | | | |
| Revenue | | $ | 143,692 | | | $ | 122,508 | | | $ | 118,814 | | | $ | 119,884 | |
| Operating expenses | | | 112,679 | | | | 107,789 | | | | 106,212 | | | | 111,737 | |
| | | | | | | | | | | | | |
| Gross margin | | | 31,013 | | | | 14,719 | | | | 12,602 | | | | 8,147 | |
| Corporate general and administrative | | | 5,726 | | | | 6,023 | | | | 6,008 | | | | 6,342 | |
| Depreciation and amortization | | | 3,861 | | | | 4,044 | | | | 4,017 | | | | 4,088 | |
| | | | | | | | | | | | | |
| Operating income (loss) | | | 21,426 | | | | 4,652 | | | | 2,577 | | | | (2,283 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | |
| | Interest expense | | | (240 | ) | | | (429 | ) | | | (369 | ) | | | (469 | ) |
| | Gain on sale of operations, net | | | 384 | | | | 534 | | | | 78 | | | | — | |
| | Other income, net | | | 531 | | | | 292 | | | | 524 | | | | 2,185 | |
| | | | | | | | | | | | | |
| | | Total other income, net | | | 675 | | | | 397 | | | | 233 | | | | 1,716 | |
| Income (loss) from continuing operations before income tax expense (benefit) | | | 22,101 | | | | 5,049 | | | | 2,810 | | | | (567 | ) |
| Income tax expense (benefit) | | | 9,061 | | | | 1,677 | | | | 1,108 | | | | (3,801 | ) |
| | | | | | | | | | | | | |
| Income from continuing operations | | | 13,040 | | | | 3,372 | | | | 1,702 | | | | 3,234 | |
| Loss from operations of discontinued operations, net of tax | | | (1,459 | ) | | | (990 | ) | | | (1,584 | ) | | | (1,396 | ) |
| Gain (loss) on disposal of discontinued operations, net of tax | | | — | | | | — | | | | 238 | | | | (106 | ) |
| | | | | | | | | | | | | |
| Net income | | $ | 11,581 | | | $ | 2,382 | | | $ | 356 | | | $ | 1,732 | |
| | | | | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.15 | | | $ | 0.04 | | | $ | 0.02 | | | $ | 0.04 | |
| | Discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.02 | ) |
| | | | | | | | | | | | | |
| | Net income | | $ | 0.14 | | | $ | 0.03 | | | $ | 0.01 | | | $ | 0.02 | |
| | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.15 | | | $ | 0.04 | | | $ | 0.02 | | | $ | 0.04 | |
| | Discontinued operations | | | (0.02 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.02 | ) |
| | | | | | | | | | | | | |
| | Net income | | $ | 0.13 | | | $ | 0.03 | | | $ | 0.01 | | | $ | 0.02 | |
| | | | | | | | | | | | | |
| Basic weighted average common shares | | | 85,437 | | | | 77,885 | | | | 77,311 | | | | 76,287 | |
| | | | | | | | | | | | | |
| Diluted weighted average common shares | | | 87,912 | | | | 80,150 | | | | 79,373 | | | | 78,449 | |
| | | | | | | | | | | | | |
During the fourth quarter of 2004, CBIZ recorded a $3.5 million net tax benefit related primarily to a favorable tax position which was successfully resolved upon completion of the Internal Revenue Service examination for the years ended December 31, 1998, 1999 and 2000. In addition, CBIZ recorded $0.4 million in interest income related to the refund, which is recorded as other income (expense), net in the accompanying consolidated statements of operations. See further discussion of the tax benefit and refund in Note 6.
F-34
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
20. SEGMENT DISCLOSURES
CBIZ'sSegment Disclosures
CBIZ’s business units have been aggregated into three reportable segments:practice groups: Accounting, Tax and Advisory Services,Services; Benefits and InsuranceInsurance; and National Practices. The business units have been aggregated based on the following factors: similarity of the products and services;services provided to clients; similarity of the regulatory environment; theand similarity of economic conditions affecting long-term performance of these units is affected by similar
economic conditions; andperformance. Additionally, the business isunits are managed along these segment lines, whichand each reportsegment line reports to a Practice Group Leader. During the year 2002 the medical practice managementThe Medical Management Professionals unit (CBIZ MMP), which reports under the segment
of National Practices exceededgroup, exceeds the quantitative threshold of SFAS No. 131, "Disclosures“Disclosures about Segments of an Enterprise and Related Information," prompting
CBIZ to disclose this reporting unit separately.
” for aggregation and therefore is reported as a separate segment.
Accounting policies of the practice groups are the same as those described in Note 1, “Summary of Significant Accounting Policies.” Upon consolidation, all intercompany accounts and transactions are eliminated; thus inter-segment revenue is not included in the measure of profit or loss for the practice groups. Performance of the practice groups is evaluated on operating income excluding the costs of infrastructure functions (such as information systems, finance and accounting, human resources, legal and marketing), which are reported in the “Corporate and Other” segment.
Accounting, Tax and Advisory Services.The Accounting, Tax and Advisory Services practice group offers services in the following areas: tax planning and
preparation; 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 financial staffing services including chief financial officer services and other financial
staff services; financial investment analysis,analysis; succession, retirement, and estate planning; and profitability, operational and efficiency enhancement consulting to a number of specialized industries.
industries; litigation support services; 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; human capital advisory services; specialty high-risk life insurance; employee benefit worksite marketing; and wealth 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,services; health care consulting,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. Management Professionals.The CBIZ MMP subsidiary of the National Practice group offers services to hospital-based physicians 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 governmentalgovernment and other third party regulations; local office management; and comprehensive statistical and operational reporting; financial reporting;reporting, accounts payable, payroll, general ledger processing; design of physician
employment, stock and compensation arrangements; comprehensive budgeting,
forecasting, and financial analysis; conducts analysesimplementation of managed care contracts with a focus on negotiation strategies, pricing, cost containment and utilization tracking; reviewsreview and negotiates contracts with hospitals and
evaluatesnegotiation of hospital contracts; evaluation of other strategic business partners; identifiesidentification and coordinatescoordination of practice mergermanager and integration opportunities; and coordinatescoordination of practice expansion efforts.
F-35
CBIZ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Corporate and other charges represent costs at the corporate officeOther.Included in Corporate and Other are operating expenses that are not
directly allocated to the
individual business
units, which include goodwill amortizationunits. These expenses are primarily comprised of incentive compensation and
impairment for all acquisitions accounted for under the purchase method of
accounting.
F-26
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Prior to 2001, CBIZ reported with four reportable segments: Accounting, Taxconsolidation and Advisory Services, Benefits and Insurance, Performance Consulting, and
Technology Services. CBIZ reorganized its management structure and changed from
four reportable segments to the three described above. Segment information for
the year ended December 31, 2000 has been reclassified in accordance with the
new segments.
integration charges. CBIZ operates in the United States and Toronto, Canada and there is no one customer that represents a significant portion of sales.
Certain amounts in the 2004 and 2003 segment data have been reclassified to account for the transfer of certain operations from the Benefits and Insurance practice group to the Accounting, Tax and Advisory practice group in January, 2005. Segment information for the years ended December 31,
2002, 2001,2005, 2004 and
20002003 was as follows (in thousands):
2002
-------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
------------------
ACCOUNTING MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
---------- ---------- -------- ------- --------- --------
Revenue.............................. $209,911 $150,514 $66,156 $77,754 $ -- $504,335
Operating expenses................... 181,891 123,369 54,481 76,589 9,336 445,666
-------- -------- ------- ------- -------- --------
Gross margin....................... 28,020 27,145 11,675 1,165 (9,336) 58,669
Corporate gen. and admin. ........... -- -- -- -- 19,672 19,672
Deprec. and amort. .................. 5,315 3,592 1,972 1,668 8,110 20,657
-------- -------- ------- ------- -------- --------
Operating income (loss)............ 22,705 23,553 9,703 (503) (37,118) 18,340
Other income (expense):
Interest expense................... (56) (76) (7) (51) (2,288) (2,478)
Loss on sale of operations, net.... -- -- -- -- 930 930
Other income (expense), net........ 455 359 (18) (1,657) (251) (1,112)
-------- -------- ------- ------- -------- --------
Total other income
(expense)................ 399 283 (25) (1,708) (1,609) (2,660)
-------- -------- ------- ------- -------- --------
Income (loss) from continuing
operations before taxes............ $ 23,104 $ 23,836 $ 9,678 $(2,211) $(38,727) $ 15,680
======== ======== ======= ======= ======== ========
F-27
CENTURY BUSINESS SERVICES, | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2005 | |
| | | | |
| | | Accounting, | | | Benefits | | | | | National | | | Corporate | | | |
| | | Tax and | | | and | | | CBIZ | | | Practices | | | and | | | |
| | | Advisory | | | Insurance | | | MMP | | | Other | | | Other | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 245,549 | | | $ | 146,216 | | | $ | 97,583 | | | $ | 69,921 | | | $ | — | | | $ | 559,269 | |
| Operating expenses | | | 208,316 | | | | 116,149 | | | | 80,033 | | | | 60,969 | | | | 19,828 | | | | 485,295 | |
| | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 37,233 | | | | 30,067 | | | | 17,550 | | | | 8,952 | | | | (19,828 | ) | | | 73,974 | |
| Corporate general & admin | | | — | | | | — | | | | — | | | | — | | | | 24,911 | | | | 24,911 | |
| Depreciation & amortization | | | 3,565 | | | | 3,014 | | | | 2,773 | | | | 572 | | | | 5,239 | | | | 15,163 | |
| | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | 33,668 | | | | 27,053 | | | | 14,777 | | | | 8,380 | | | | (49,978 | ) | | | 33,900 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest expense | | | (115 | ) | | | (4 | ) | | | — | | | | — | | | | (2,990 | ) | | | (3,109 | ) |
| | Gain on sale of operations, net | | | — | | | | — | | | | — | | | | — | | | | 314 | | | | 314 | |
| | Other income, net | | | 439 | | | | 422 | | | | 98 | | | | 1,215 | | | | 2,878 | | | | 5,052 | |
| | | | | | | | | | | | | | | | | | | |
| | | Total other income | | | 324 | | | | 418 | | | | 98 | | | | 1,215 | | | | 202 | | | | 2,257 | |
| | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations before income tax expense | | $ | 33,992 | | | $ | 27,471 | | | $ | 14,875 | | | $ | 9,595 | | | $ | (49,776 | ) | | $ | 36,157 | |
| | | | | | | | | | | | | | | | | | | |
F-36
CBIZ, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2001
-------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
------------------
ACCOUNTING MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
---------- ---------- -------- ------- --------- --------
Revenue.............................. $231,361 $141,287 $56,838 $87,406 $ -- $516,892
Operating expenses................... 197,286 112,131 45,786 83,812 8,498 447,513
-------- -------- ------- ------- -------- --------
Gross margin....................... 34,075 29,156 11,052 3,594 (8,498) 69,379
Corporate gen. and admin. ........... -- -- -- -- 19,797 19,797
Deprec. and amort. .................. 4,635 3,683 1,516 1,755 29,047 40,636
-------- -------- ------- ------- -------- --------
Operating income (loss)............ 29,440 25,473 9,536 1,839 (57,342) 8,946
Other income (expense):
Interest expense................... (91) (133) (16) (63) (6,494) (6,797)
Loss on sale of operations, net.... -- -- -- -- (7,113) (7,113)
Other income (expense), net........ 615 865 7 2,479 (27) 3,939
-------- -------- ------- ------- -------- --------
Total other income
(expense)................ 524 732 (9) 2,416 (13,634) (9,971)
-------- -------- ------- ------- -------- --------
Income (loss) from continuing
operations before taxes............ $ 29,964 $ 26,205 $ 9,527 $ 4,255 $(70,976) $ (1,025)
======== ======== ======= ======= ======== ========
2000
--------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-------------------
ACCOUNTING MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
---------- ---------- -------- -------- --------- --------
Revenue............................ $238,962 $150,964 $38,523 $122,722 $ -- $551,171
Operating expenses................. 209,352 119,579 33,343 118,792 9,515 490,581
-------- -------- ------- -------- --------- --------
Gross margin..................... 29,610 31,385 5,180 3,930 (9,515) 60,590
Corporate gen. and admin. ......... -- -- -- -- 24,694 24,694
Deprec. and amort. ................ 4,681 3,673 1,014 2,235 31,736 43,339
-------- -------- ------- -------- --------- --------
Operating income (loss).......... 24,929 27,712 4,166 1,695 (65,945) (7,443)
Other income (expense):
Interest expense................. (329) (149) (12) (126) (11,497) (12,113)
Goodwill Impairment.............. -- -- -- -- (32,953) (32,953)
Loss on sale of operations,
net........................... -- -- -- -- (31,576) (31,576)
Other income (expense),net....... 331 (1,051) 63 1,833 (7,010) (5,834)
-------- -------- ------- -------- --------- --------
Total other income
(expense).............. 2 (1,200) 51 1,707 (83,036) (82,476)
-------- -------- ------- -------- --------- --------
Income (loss) from continuing
operations before taxes.......... $ 24,931 $ 26,512 $ 4,217 $ 3,402 $(148,981) $(89,919)
======== ======== ======= ======== ========= ========
21. DISCONTINUED OPERATIONS
During 2002, — (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2004 | |
| | | | |
| | | Accounting, | | | Benefits | | | | | National | | | Corporate | | | |
| | | Tax and | | | and | | | CBIZ | | | Practices | | | and | | | |
| | | Advisory | | | Insurance | | | MMP | | | Other | | | Other | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 212,010 | | | $ | 141,258 | | | $ | 87,261 | | | $ | 64,369 | | | $ | — | | | $ | 504,898 | |
| Operating expenses | | | 182,564 | | | | 112,987 | | | | 71,885 | | | | 57,208 | | | | 13,773 | | | | 438,417 | |
| | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 29,446 | | | | 28,271 | | | | 15,376 | | | | 7,161 | | | | (13,773 | ) | | | 66,481 | |
| Corporate general & admin | | | — | | | | — | | | | — | | | | — | | | | 24,099 | | | | 24,099 | |
| Depreciation & amortization | | | 3,687 | | | | 2,825 | | | | 2,719 | | | | 714 | | | | 6,065 | | | | 16,010 | |
| | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | 25,759 | | | | 25,446 | | | | 12,657 | | | | 6,447 | | | | (43,937 | ) | | | 26,372 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest income (expense) | | | (43 | ) | | | 57 | | | | (1 | ) | | | 20 | | | | (1,540 | ) | | | (1,507 | ) |
| | Gain on sale of operations, net | | | — | | | | — | | | | — | | | | — | | | | 996 | | | | 996 | |
| | Other income, net | | | 363 | | | | 782 | | | | 25 | | | | 423 | | | | 1,939 | | | | 3,532 | |
| | | | | | | | | | | | | | | | | | | |
| | | Total other income | | | 320 | | | | 839 | | | | 24 | | | | 443 | | | | 1,395 | | | | 3,021 | |
| | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations before income tax expense | | $ | 26,079 | | | $ | 26,285 | | | $ | 12,681 | | | $ | 6,890 | | | $ | (42,542 | ) | | $ | 29,393 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2003 | |
| | | | |
| | | Accounting, | | | Benefits | | | | | National | | | Corporate | | | |
| | | Tax and | | | and | | | CBIZ | | | Practices | | | and | | | |
| | | Advisory | | | Insurance | | | MMP | | | Other | | | Other | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 202,069 | | | $ | 144,009 | | | $ | 75,785 | | | $ | 60,391 | | | $ | — | | | $ | 482,254 | |
| Operating expenses | | | 176,594 | | | | 112,136 | | | | 61,566 | | | | 61,176 | | | | 8,460 | | | | 419,932 | |
| | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 25,475 | | | | 31,873 | | | | 14,219 | | | | (785 | ) | | | (8,460 | ) | | | 62,322 | |
| Corporate general & admin | | | — | | | | — | | | | — | | | | — | | | | 18,745 | | | | 18,745 | |
| Depreciation & amortization | | | 4,272 | | | | 2,797 | | | | 2,595 | | | | 813 | | | | 6,104 | | | | 16,581 | |
| | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | 21,203 | | | | 29,076 | | | | 11,624 | | | | (1,598 | ) | | | (33,309 | ) | | | 26,996 | |
| 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 | | | 652 | | | | 53 | | | | (17 | ) | | | 185 | | | | (2,100 | ) | | | (1,227 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | Total other income (expense) | | | 603 | | | | (10 | ) | | | (22 | ) | | | 184 | | | | (518 | ) | | | 237 | |
| | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations before income tax expense | | $ | 21,806 | | | $ | 29,066 | | | $ | 11,602 | | | $ | (1,414 | ) | | $ | (33,827 | ) | | $ | 27,233 | |
| | | | | | | | | | | | | | | | | | | |
F-37
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. The business operations are reported as discontinued
operations and the net assets and liabilities and results of operations are
reported separately in the consolidated
F-28
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
financial statements. Four of these operations were either sold or closed as of
December 31, 2002 for an aggregate price of $4.6 million of cash and $0.2
million of notes receivables. One operation still remains available for sale as
of December 31, 2002. — (Continued)
21. Subsequent Events
In
connection with these five divestitures, CBIZ recorded
a loss on disposal of discontinued operations, net of tax, of $2.5 million.
Revenues from the discontinued operations for the year ended December 31
2002, 2001 and 2000 were $7.2 million, $10.0 million and $16.6 million,
respectively.
The net assets and liabilities of the five business units classified of
discontinued operations consisted of the following (in thousands):
2002 2001
------ -------
Accounts receivable, net.................................... $5,499 $ 8,367
Property and equipment, net................................. 508 1,244
Deferred tax asset, net..................................... 3,554 4,088
Intangible assets, net...................................... -- 4,907
Other assets................................................ 5 1,885
------ -------
Assets of discontinued operation............................ 9,566 20,941
====== =======
Accounts payable............................................ 425 369
Accrued expenses............................................ 6,480 4,227
------ -------
Liabilities of discontinued operation....................... $6,905 $ 4,596
====== =======
In October 2000,January 2006, CBIZ completed the
saleacquisitions of
its risk-bearing specialtytwo companies. Valley Global Insurance Brokers is a property and casualty insurance
segment (which included Century Surety Company, Evergreen National
Indemnity Company,broker focusing primarily on the construction and
Continental Heritagetechnology industries. Valley Global Insurance
Company)Brokers is located in San Jose, California and will complement our Benefits and Insurance practice group. The TriMed Group provides medical billing services and in-house computer systems primarily to hospital-based physician practices. The TriMed Group is located in Flint, Michigan and will be merged into CBIZ’s Medical Management Professionals business.In January 2006, CBIZ and Mayer Hoffman McCann P.C. extended the term of their administrative service agreement through 2019, which expiration date is subject to further extension upon agreement by the Parties.
In January 2006, CBIZ acquired the trade name of a nationally recognized practice which will be complementary to our accounting, tax and advisory practice. Such trade name is being licensed to Mayer Hoffman McCann P.C. for $28a ten year period.
On February 9, 2006, CBIZ’s Board of Directors authorized the purchase of up to 5.0 million shares of CBIZ common stock through March 31, 2007. The shares may be repurchased in cash, resulting inthe open market or through privately negotiated purchases.
Effective February 13, 2006, CBIZ entered into a loss on disposalnew $100 million unsecured credit facility, with an option to increase the commitment to $150 million. The credit facility is maintained by Bank of discontinued business, netAmerica, N.A. as agent bank for a group of tax,five participating banks and has a five year term expiring February 2011.
Effective February 21, 2006, CBIZ’s Board of $5.7 million forDirectors granted 627,000 restricted performance shares pursuant to the year ended2002 Stock Incentive Plan. Performance awards will only vest and become exercisable provided that CBIZ meets certain pre-determined earnings per share targets at December 31, 2000.
22. SUBSEQUENT EVENTS
In January 2003, 2007.
F-38
CBIZ, completed the acquisition of a benefits and insurance
firm. The aggregate purchase price of this acquisition was approximately $0.7
million in cash, 177,000 shares of restricted common stock (estimated stock
value of $0.5 million at acquisition) and was accounted for under the purchase
method of accounting.
F-29
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES SCHEDULE II --— VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEARS ENDED DECEMBER 31, 2002, 2001,2005, 2004, AND 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------ ------------ -------------------------------------- ----------- ----------
ADDITIONS
--------------------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING OF COST & TO OTHER ACQUISITIONS/ RECOVERIES/ END OF
PERIOD EXPENSE ACCOUNTS DIVESTITURES DEDUCTIONS PERIOD
------------ ---------- --------- ------------- ----------- ----------
YEAR ENDED DECEMBER 31,
2002
Allowance deducted from
assets to which they
apply:
Allowance for doubtful
accounts.............. $12,720 $ 7,201 $ (523) $(167) $(10,396) $ 8,835
======= ======= ======= ===== ======== =======
YEAR ENDED DECEMBER 31,
2001
Allowance deducted from
assets to which they
apply:
Allowance for doubtful
accounts.............. $18,900 $ 8,059 $(1,126) -- $(13,113) $12,720
======= ======= ======= ===== ======== =======
YEAR ENDED DECEMBER 31,
2000
Allowance deducted from
assets to which they
apply:
Allowance for doubtful
accounts.............. $15,727 $21,887 $ 948 -- $(19,662) $18,900
======= ======= ======= ===== ======== =======
F-30
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Steven I. Gerard, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Century Business
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
By: /s/ STEVEN L. GERARD
------------------------------------
Steven L. Gerard
Chief Executive Officer
Date: March 24, 2003
F-31
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Ware H. Grove, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Century Business
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
By: /s/ WARE H. GROVE
------------------------------------
Ware H. Grove
Chief Financial Officer
Date: March 24, 2003
F-32
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| COLUMN A | | COLUMN B | | | COLUMN C | | | COLUMN D | | | COLUMN E | |
| | | | | | | | | | | | | |
| | | | | Additions | | | | | |
| | | | | | | | | | |
| | | Balance at | | | Charged to | | | Charged to | | | Acquisitions | | | Charge-offs, | | | Balance at | |
| | | Beginning of | | | Cost and | | | Other | | | and | | | Net of | | | End of | |
| | | Period | | | Expense | | | Accounts | | | Divestitures | | | Recoveries | | | Period | |
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2005: | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance deducted from assets to which they apply: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts | | $ | 5,970 | | | $ | 5,446 | | | $ | (396 | ) | | $ | — | | | $ | (5,219 | ) | | $ | 5,801 | |
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2004: | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance deducted from assets to which they apply: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts | | $ | 6,231 | | | $ | 4,438 | | | $ | 374 | | | $ | 57 | | | $ | (5,130 | ) | | $ | 5,970 | |
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2003: | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance deducted from assets to which they apply: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance for doubtful accounts | | $ | 6,467 | | | $ | 5,144 | | | $ | 77 | | | $ | (164 | ) | | $ | (5,293 | ) | | $ | 6,231 | |
| | | | | | | | | | | | | | | | | | | |
F-39