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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31, 1997 OR2002 or
[ ] TRANSITION]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TOFor the Transition Period from to .
COMMISSION FILE NUMBER 0-25890
CENTURY BUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
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(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OHIO 44125
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
DELAWARE 22-2769024
- -------------------------------------------- --------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6480 ROCKSIDE WOODS BOULEVARD SOUTH,
SUITE 330
CLEVELAND, OHIO 44131
- -------------------------------------------- --------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODECODE: (216) 447-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Name of Each Exchange on Which Registered:
The Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant iswas approximately $371,104,081$308.4 million as of February 13, 1998.June 28, 2002. The number
of outstanding shares of the Registrant's common stock is 47,406,73895,409,243 shares as
of February 13, 1998.March 24, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative
to the 19982003 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration statements.
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CENTURY BUSINESS SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 19972002
TABLE OF CONTENTS
PAGE
----
PART I
Items 1 and 2. Business and Properties................................................Properties..................................... 3
Item 3. Legal Proceedings...................................................... 12Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.................... 12Holders......... 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters... 17Matters..................................................... 14
Item 6. Selected Financial Data................................................ 17Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 19Operations................................... 16
Item 7A. Quantitative and Qualitative Information About Market
Risk.............Risk........................................................ 26
Item 8. Financial Statements and Supplementary Data............................Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................Disclosure.................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 26Registrant.......... 27
Item 11. Executive Compensation................................................. 26Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management......... 26Management.................................................. 30
Item 13. Certain Relationships and Related Transactions......................... 27Transactions.............. 30
Item 14. Controls and Procedures..................................... 31
PART IV
Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form
8-K........ 278-K......................................................... 31
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THE FOLLOWING TEXT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL REPORT").10-K. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS ANNUAL REPORT TO "CENTURY""WE", "OUR",
"CBIZ", OR THE "COMPANY" SHALL MEAN CENTURY BUSINESS SERVICES, INC., A DELAWARE
CORPORATION, AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
CenturyCBIZ is a diversified services company which, acting through its
subsidiaries, provides professional outsourced business services including specialty
insurance services,primarily to
small and medium sized commercialmedium-sized businesses, as well as individuals, governmental entities
and not-for-profit enterprises throughout the United States.
The Company providesStates and Toronto, Canada.
CBIZ delivers integrated services inthrough the following areas: accounting
systems, advisorythree practice groups:
- Accounting, Tax and tax; employee benefits designAdvisory (formerly known as the Business Solutions
Group);
- Benefits and administration; human
resources; information technology systems; payroll; specialty insurance;
valuation;Insurance; and
workers' compensation. These- National Practices
CBIZ provides services are provided through a
network of 82 Company offices in 26 states, as well as through its subsidiary
Comprehensive Business Services, Inc. ("Comprehensive"), a franchisor of
accounting services59 business units with approximately 250 franchiseemore than 160 offices
located in 40
states. As of December 31, 1997,33 states, Washington D.C., and Toronto, Canada. Included in this
total, and managed within the Company served approximately 60,000
clients, of which approximately 24,000 were served through the Comprehensive
franchisee network. Management estimates thatNational Practice group, is the Company's clients employ over
one million employees, including 240,000 employed by clients ofmedical
practice management business unit which has 73 offices.
CBIZ's goal is to be the Comprehensive franchisee network.
In October 1996, Century completed two acquisitions (the "Merger
Transactions") pursuant to which it acquired, through a reverse merger, Century
Surety Company ("CSC") and its subsidiaries (together with CSC, the "CSC
Group"), which includes three insurance companies, and Commercial Surety Agency,
Inc. d/b/a Century Surety Underwriters ("CSU"), an insurance agency that markets
surety bonds.
In December 1996, the Company acquired SMR & Co. Business Services ("SMR").
Through SMR, Century provides a wide rangeleading provider of outsourced business services
including information technology consulting, tax return preparationwithin its target markets by providing clients with a broad range of
high-quality products and compliance, tax planning, business valuation, human resource management,
successionservices; expanding locally through internal growth;
and estate planning, personal financial planning and employee benefitthrough cross-severing. CBIZ initiated an acquisition program design and administration to individuals and small and medium sized
commercial enterprises primarily in Ohio. Pursuant to a strategic redirection of
the Company initiated in November
1996 the Company began its acquisition
program to expand its operations rapidly in the professional outsourced business services
industry from its existing specialty insurance platform.
During 1997, the Companyindustry. Since that time, CBIZ has acquired the businesses of 39147 companies,
representing over $134 millionone of which was acquired in annualized revenues at the timeOctober 2002 and another of acquisition. The majority of these acquisitions have been accounted for under
the purchase method of accounting. The Company anticipates future significant
acquisitions will be accounted for, when possible, under the pooling of
interests method of accounting. During 1997, the Company's acquisitions resultedwhich was acquired in
significant increasesJanuary 2003. While we acquired only one business in goodwill and other intangible assets, and the
Company anticipates that such increases will continue as a result of future
acquisitions. The excess of cost over the fair value of net assets of2002, it remains our
intention to selectively acquire businesses acquired (goodwill), was approximately $89.856 million at December 31, 1997,
representing approximately 31% of the Company's total assets. The Company
amortizes goodwill on a straight-line basis over periods not exceeding 30 years.
The Company has completed from December 31, 1997 through February 17, 1998,
or has publicly announced as pending, an additional seven acquisitions
representing over $46 millionwith complementary services in
annualized revenues at the time of acquisition.
These acquisitions are not included in the results of operations for the period
ended December 31, 1997. The Company believes that substantial additional
acquisition opportunities exist in the outsourced business services industry.
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The Company strategy is to grow aggressively as a diversified services
company by expanding its recently acquired outsourced business services and
specialty insurance operations through internal growth and additional
acquisitions in such industries. See "-- Business Strategy."
Century was formedtarget markets.
Formed as a Delaware corporation in 1987 under the name Stout
Associates,Environmental, Inc. ("Stout") and primarily supplied hazardous waste services. In
1992, the Company, CBIZ was acquired by Republic Industries, Inc. ("RII").in 1992. In
April 1995, RII effected a spin-off ofRepublic spun off its hazardous waste operations, through a
distribution of theincluding CBIZ's
predecessor company, to stockholders. Re-named Republic Environmental Systems,
Inc., CBIZ's common stock $.01 par value per share ("Common Stock"), to
the stockholders of record of RII (the "Spin-off"). At such time, the Company
was named "Republic Environmental Systems, Inc." and was tradedbegan trading on the Nasdaq National Market under the
symbol "RESI." On June 24, 1996, the Company began
trading under the symbol changed to "IASI" in
anticipation of theour merger with Century Surety Company and Commercial Surety
Agency, Inc., which ultimately resulted in a change of itsour name to "International Alliance
Services, Inc." TheThis name change signaled a new direction for the Companyour move away from itsthe hazardous waste
business. In furtherance of its strategic redirection towards business services, the
Company successfullyCBIZ divested itsall remaining hazardous waste operations in two separate
transactions completed in July and September 1997. On
December 23, 1997, the
CompanyCBIZ changed its name to Century Business Services, Inc. and
began trading under the symbol "CBIZ". See "-- Liquidity and Capital Resources."CBIZ."
In June 1996,
the Company declared and distributed a two-for-one stock split in the form of a
100% stock dividend ("Stock Split"). All the share numbers and per share amounts
set forth herein reflect the Stock Split.
The principal executive office of Century is located at 10055 Sweet Valley
Drive, Valley View, Ohio, 44125 and its telephone number is (216) 447-9000. In
March 1998, the Company's principal executive office will be relocated toCBIZ'S PRINCIPAL EXECUTIVE OFFICE IS LOCATED AT 6480 Rockside Woods Blvd.ROCKSIDE WOODS BLVD.,
South, SuiteSOUTH, SUITE 330, Cleveland, Ohio 44131. Its telephone
number will remain the same.CLEVELAND, OHIO 44131 AND ITS TELEPHONE NUMBER IS
216-447-9000.
BUSINESS STRATEGY
Century'sCBIZ's business strategy is to grow aggressively by expanding its
current operations 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 with our diverse business services offerings;
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- leveraging our practice area expertise across all our businesses; and
specialty insurance
areas, having discontinued and disposed- developing our core service offerings in target markets through selective
acquisitions.
Providing a range of its operations in the environmental
service area. The Company plans to implement its business strategy through
internal growth and by acquiring and integrating existing businesses that
provide outsourced business services or specialtyto a client results in
advantages for both the client and for CBIZ. Dealing with one provider for
several tasks saves the client the time of having to deal with multiple vendors.
For example, the employee data used to process payroll can also be used by CBIZ
as a group health and welfare insurance services.agent and benefits consultant to provide
appropriate benefits package to a client's employee base. The Company generally targetsability to combine
several services and offer them through one provider distinguishes CBIZ from
other outsourced service providers.
CBIZ is looking to strengthen our operations and customer service
capabilities by making selective acquisitions in markets where it will be, orwe currently
operate and where the prospects are favorable to increase itsour market share toand
become a significant provider of a comprehensive range of outsourced business
services
and specialty insurance. Century'sservices. CBIZ's strategy is to acquire companies that (i)
have strong and energetic entrepreneurial leadership; (ii) have historic and
expected future internal growth; (iii) can add to the level and breadth of
services offered by Century thereby enhancing its competitive advantage over
other outsourced business services providers; (iv) have a strong income stream;
and (v)generally:
- have a strong potential for cross-sellingcross-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 Company's
subsidiaries.core CBIZ service offering in a geographical market.
In accordance with our strategy to deliver services to clients
conveniently, and to promote cross-serving between our various service groups,
CBIZ consolidates office locations wherever practical. Since 2000, CBIZ
consolidated offices in Atlanta, Chicago, Cleveland, Columbus, Dallas, Los
Angeles, Orlando, Minneapolis, St. Louis, San Ramon, and Philadelphia. CBIZ will
continue to combine offices, with a consolidation planned for Kansas City in
mid-2003 and other potential consolidations to occur later. As opportunities are identified, and tested against such criteria,further
consolidations occur, the Company may acquire outsourced business providers throughout the United
States.
The Company uses internal acquisition teams and its contacts in the
outsourced business services and specialty insurance industries to identify,
evaluate and acquire businesses in attractive markets. Acquisition candidates
are evaluated by the Company's internal acquisition teams based on a
comprehensive process which includes operational, legal and financial due
diligence reviews.
Although management believes that the Company currently has sufficient
resources, including cash on hand, cash flow from operating activities, credit
facilities and access to financial markets to fund current and planned
operations, service any outstanding debt and make certain acquisitions, there
can be no assurance thatincur additional financing will be available on a timely
basis, if at all, or that it will be available on terms acceptable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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ACQUISITIONS
Recent Acquisitions
During 1997, the Company continued its strategic acquisition program,
purchasing the businesses of 39 complementary companies. These acquisitions
comprised the following: ten accounting systems and tax advisory businesses,
including Comprehensive, a franchisor of accounting services; eight specialty
insurance businesses; four workers' compensation administration businesses; ten
payroll administration/benefits design and administration firms; three human
resources/executive search firms; one valuation and appraisal group; two
technology firms; and one broker/dealer. The aggregate purchase price of the
aforementioned acquisitions was approximately $87.748 million, and includes
future contingent consideration of up to $5.880 million in cash and 1,716,226
shares of restricted common stock,costs associated with
an estimated stock value at date of
acquisition of $17.848 million, based on the acquired companies' ability to meet
certain performance goals. The aggregate purchase price, comprised of cash
payments, issuance of promissory notes, and issuance of Common Stock, has been
allocated to the net assets of the Company based upon their respective fair
market values. See Footnote 2 to the Consolidated and Combined Financial
Statements contained herein.
DIVESTITURES
In July 1997, the Company sold the majority of its environmental services
business, and in September 1997, sold its remaining environmental operations.
Taken together, these transactions for cash and notes resulted in a net loss of
$572,000. The Company's contingent liability is limited to $1.5 million in
connection with such divestitures. Management does not believe the Company will
experience a loss in connection with such contingencies.
In December 1997, the Company sold Environmental and Commercial Insurance
Agency, Inc. and Environmental and Commercial Insurance Agency of LA, Inc. for
cash consideration resulting in a gain of approximately $171,000.consolidations.
OUTSOURCED BUSINESS SERVICES
GENERAL
Through its business services subsidiaries, Century provides a wide range
of integrated business services to small and medium sized companies throughout
the United States. It is the Company's goal to be the nation's leading provider
of outsourced business services to its target market. The Company's strategies
to achieve this goal include: (i) continuing to provide clients with a broad
range of high quality products and services, (ii) continuing to expand locally
through internal growth by increasing the number of clients it serves and
increasing the number of services it provides to existing clients, and (iii)
continuing to expand nationally through an aggressive acquisition program.
The following is a description of the outsourced business services
currently offered by the Company.
OPERATIONSCBIZ.
Accounting, Tax and Advisory. The Company provides integratedbusiness units that comprise CBIZ's
Accounting, Tax and Advisory ("ATA") group offer services in the following
areas: cash flow management; strategic planning; consulting; record-keeping;
federal, state and local tax return preparation; tax planning based on financial
and investment alternatives; tax structuring of business transactions such as
mergers and acquisitions; quarterly and year-end payroll tax reporting;
corporate, partnership and fiduciary tax planning and return preparation;
outsourced chief financial officer services and other financial staffing
services; financial investment analysis; succession, retirement, and estate
planning; and profitability, operational and efficiency enhancement consulting
to a number of specialized industries. Other than internal audit services, CBIZ
does not currently offer audit and attest services, does not intend to offer
audit and attest services in the future and does not purchase the "audit and
attest practices" of any accounting systems, advisorybusiness it acquires. However, CBIZ and tax;its
subsidiaries maintain joint-referral relationships and service agreements with
licensed Certified Public Accounting or CPA firms under which audit and attest
services may be provided to CBIZ's clients.
Under these service agreements with licensed CPA firms, CBIZ subsidiaries
provide to the CPA firms, administrative services, including office,
bookkeeping, accounting and other administrative services; prepare marketing and
promotion materials; and lease administrative and professional staff in exchange
for a fee. Non-attest business services include any services other than those
which only licensed certified public accountants, licensed public accountants,
or licensed CPA or PA firms may perform in accordance with accountancy laws.
Under these agreements, each party has agreed to maintain its own liability and
risk of loss in connection with performance of its respective services. CBIZ
currently undergoes an annual peer review administered to ensure compliance with
independence requirements in its relationships with associated CPA firms and
clients. The peer review has found CBIZ in compliance with these rules every
year since the review was first administered in 1999.
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Of the 41 CPA firms associated with CBIZ during 2002, the partner group
from twelve of those firms joined Mayer Hoffman McCann P.C., an independent
national CPA firm headquartered in Kansas City, Missouri. CBIZ's association
with Mayer Hoffman McCann 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 it
maintains administrative service agreements.
CBIZ's ATA practice is divided into four regions, representing the East,
Midwest, Great Lakes, and West regions of the country. Each of these regions is
headed by a designated regional director, all of whom report to the Senior Vice
President, Accounting, Tax and Advisory Services.
The Accounting, Tax and Advisory group contributed approximately $209.9
million of revenue, or 42% of CBIZ's annual revenue, in 2002.
Benefits and Insurance Services. The business units that comprise CBIZ's
Benefits and Insurance group offer services in the following areas: employee
benefits, insurance brokerage, consulting, and administration, including the
design, implementation and administration of qualified plans, such as
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 educate
employees about their benefit programs; executive benefits consulting on
non-qualified retirement plans and business continuation plans; specialty
high-risk life insurance; employee benefit worksite marketing; and wealth
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
service, CBIZSolutions.com, that, in concert with our payroll services, enables
the employees of a client to access information such as health and welfare
benefits, retirement fund balances and payroll information; update their
personal information; and access company documents like employee handbooks and
policies.
CBIZ's Benefits and Insurance Services group operates under one Senior Vice
President, who oversees three regional divisions and their respective directors,
representing 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.
The Benefits and Insurance group contributed approximately $150.5 million
of revenue, or 30% of CBIZ's annual revenue, in 2002.
National Practices. The business units that comprise CBIZ's National
Practices group offer services in the following areas: payroll processing and
administration; valuations of commercial, tangible, and intangible assets and
financial securities; mergers and acquisitions and capital advisory services;
health care consulting; government relations; process improvement; and
technology consulting, including strategic technology planning, project
management, development, network design and administration; human
resources; information technology systems; payroll; valuation;implementation and workers'
compensation. These services are provided through a networksoftware
selection and implementation. CBIZ's medical practice management business, CBIZ
Medical Management Professionals ("CBIZ MMP"), is managed within the National
Practices group and is described below.
The business units within the National Practices group report to CBIZ's
President and Chief Operating Officer.
The National Practices group contributed approximately $143.9 million of
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officesrevenue, or 29% of CBIZ's annual revenue, in 26 states, as well as through its subsidiary Comprehensive, a
franchisor of accounting services with approximately 250 franchisee offices
located2002. Included in 40 states. As of December 31, 1997, the Company served approximately
60,000 clients, of which approximately 24,000 are served through the
Comprehensive franchisee network. Management estimates that its clients employ
over one million employees, including 240,000 employed by clientsresults of
the Comprehensive franchisee network.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, CBIZ MMP, provides billing and
practice management services to hospital-based medical practices primarily in
the specialties of anesthesiology, emergency medicine, pathology, and radiology.
CBIZ MMP's billing services include: billing and accounts receivable management;
coding and automated claims filing; comprehensive delinquent claims follow up
and collections; compliance plans to meet governmental and other third party
regulations; local office management; and comprehensive statistical and
operational reporting. The Company'sfinancial management services provided by CBIZ MMP
include:
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financial reporting, accounts payable, payroll, general ledger processing;
design of physician employment, stock and compensation arrangements; and
comprehensive budgeting, forecasting, and financial analysis. Additionally, CBIZ
MMP conducts analyses of managed care contracts with a focus on negotiation
strategies, pricing, cost containment and utilization tracking; reviews and
negotiates contracts with hospitals and evaluates other strategic business
partners; 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 in attracting, retaining and providing
services to clients are:
- established relationships;
- strong local and regional presence;
- the ability to match client requirements with available services;
- the ability to offer a number of services from one provider; and
- the ability to offer services at competitive rates.
CBIZ believes that by combining a local entrepreneurial marketing strategy
with the resources of a nationally branded company, we will be able to maximize
our market penetration. CBIZ expects that we can cross-serve new products and
services to existing clients who do not currently utilize all of the services
CBIZ offers.
CBIZ's primary marketing strategy is to deepen our relationships with
clients by providing them with additional CBIZ services that would be in the
best interest of their business. CBIZ refers to this strategy of penetrating our
existing client 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. These resources include print and radio advertisements, printed
material such as brochures and stationery, and CBIZ-branded merchandise for
trade shows and other client-oriented events. Additionally, CBIZ is developing a
centralized client database, "CNECT", which we expect to have fully implemented
by year-end 2003. CNECT will support marketing efforts such as improved client
service, new business development and product development. New clients are
generated primarily through networking, referrals from existing clients and
participation in trade shows.
The Company maintains a joint marketing agreement with HarborView Partners
(HarborView), a Stamford, Connecticut-based provider of internal audit and
business advisory services. Under 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
CBIZ provides professional outsourced business services to over 65,000
clients. CBIZ's clients typically have fewer than 500 employees and prefer to
focus their resources on operational competencies while allowing Century to
provideoutsourcing non-core
administrative functions. In many instances, outsourcingfunctions to CBIZ. Outsourcing administrative functions allows
clients to enhance productivity, reduce costs and improve service, quality and
efficiency.efficiency by focusing on their core business. Depending on a client's size and
capabilities, it may choose to utilize allsome or a
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portionmany of the Company'sCBIZ's broad array of
services, which it typically accesses initially through a single Companyits original CBIZ
representative.
ACCOUNTING SYSTEMS, ADVISORY AND TAX SERVICES. The Company offers tax
planning and preparation, cash flow management, strategic planning, consulting
services for outsourced departments, and recordkeeping assistance. In addition
to federal, state and local tax return preparation, the Company provides tax
projections based on financial and investment alternatives and assists in
appropriate tax structuring of business transactions such as mergers and
acquisitions. The Company offers quarterly and year-end payroll tax reporting,
corporate, partnership and fiduciary tax planning and return preparation. In
addition, the Company offers small and medium sized businesses the opportunity
to outsource their back-office functions. The Company also offers financial
planning services to individuals, including investment counseling, personal
financial statements, mortgage and investment analysis, succession planning,
retirement planning and estate planning. In addition, the Company offers
profitability, operational and efficiency enhancement consulting to a number of
specialized industries.
EMPLOYEE BENEFITS DESIGN AND ADMINISTRATION. The Company offers
comprehensive employee benefits consulting services. These include the design,
implementation and administration of 401(k) plans, profit sharing plans, defined
benefit plans, money purchase plans and actuarial services. The Company also
assists in the choice of health and welfare benefits such as group health
insurance plans, dental and vision care programs, group life insurance programs,
accidental death and dismemberment or disability programs, voluntary insurance
programs, health care and dependent care spending accounts and premium
reimbursement plans. In addition, the Company offers communications services to
inform and educate employees about their benefit programs. The Company also
offers executive benefits consulting on non-qualified retirement plans and
business continuation plans. Moreover, one of the Company's subsidiaries offers
Registered Investment Advisory Services, including Investment Policy Statements
(IPS), mutual fund selection based on IPS and ongoing mutual fund monitoring.
HUMAN RESOURCES SERVICES. The Company offers executive search and
placement, outplacement, organizational and management training and development,
personnel records and employment process administration, regulatory compliance
training, employment relations audits, organizational structure and executive
compensation analyses, opinion surveys, and supervisory training. The Company
expects to provide additional services, including pre-employment screening,
specialized systems such as applicant skill evaluations, customer contact
monitoring, and employee assessment and selection. The Company can assist with
the implementation of programs to strengthen both the financial and human
resources sides of the client's business. The Company has developed detailed
personnel guides, which set forth a systematic approach to administering
personnel policies and practices, including recruiting, discipline and
termination procedures. In addition, the Company will review and revise, if
necessary, personnel policies and employee handbooks or will create customized
handbooks for its clients.
INFORMATION TECHNOLOGY CONSULTING SERVICES. The Company offers a wide
range of information technology services, from creating strategic technology
plans to developing and implementing software and hardware solutions.
Specifically, the Company provides strategic technology planning, project
management, development of Internet/Intranet applications including Internet
security, custom software development, design and implementation of both wide
access network ("WAN") and local access network ("LAN") networks, and accounting
software selection and implementation. The Company utilizes a methodology, in
which business needs drive technology, ensuring appropriate technical solutions
for the Company's small and medium sized information technology clients.
PAYROLL SERVICES. The Company processes time and attendance data to
calculate and produce employee paychecks, direct deposits and reports for its
clients. The Company delivers the paychecks and reports to clients within 24 to
48 hours of the Company's receipt of the data electronically submitted from the
client. The Company's system is highly configurable to meet the specialized
needs of each client yet maintains the ability to provide high volume
processing. The system integrates easily with the client's general ledger, human
resources and time and attendance systems. In addition, the Company offers many
sophisticated features, including the automatic enrollment and tracking of paid
time off, proration of compensation for new hires, integrated garnishment
processing, escrow services and funds administration services. The Company
assumes responsibility for payroll and attendant recordkeeping, payroll tax
deposits, payroll tax reporting, and all federal, state, county
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and city payroll tax reports (including 941s, 940s, W-2s, W-3s, W-4s and W-5s),
state unemployment taxes, employee file maintenance, unemployment claims and
monitoring and responding to changing regulatory requirements. The Company will
also represent the client before tax authorities in any payroll tax dispute or
inquiry.
SPECIALTY INSURANCE SERVICES. See the description in "Specialty Insurance
Services".
VALUATION SERVICES. The Company offers appraisal and valuations of
commercial tangible and intangible assets and valuation of financial securities.
The Company conducts real estate valuations for financing feasibility studies,
marketability and market value studies and performs business enterprise and
capital stock valuations for mergers and acquisitions, estate planning, employee
stock ownership trusts, sale, purchase or litigation purposes. The Company
assists in asset allocation issues, fixed asset insurance matters, fixed asset
tracking, specialized valuation consulting, investment transfer planning and
other valuation services.
WORKERS' COMPENSATION SERVICES. Each state requires employers to provide
workers' compensation coverage for employees. The Company's services vary from
state to state; however, it generally provides employers with an integrated
system of actuarial analysis and underwriting capabilities with claims
administration and has the capability to market workers' compensation products
in three states. Professional administration can offer clients sizable savings
by controlling the costs of premiums, claims and risks. Services include:
deductible programs available to further reduce costs, claims preparation and
filing, expert claims management and loss control, medical referral network for
employees, multi-state coverages, Occupational Safety and Health Administration
("OSHA") compliance and record keeping, OSHA 200 logs preparation, certificates
of insurance, loss prevention strategies, free fraud investigation, safety
program development consultation, workers' compensation audits and
classification analysis for compliance.
SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
The Company's key competitive factors in obtaining clients for business
services are a strong existing sales network and marketing program, established
relationships and the ability to match client requirements with available
services and products at competitive prices. The Company believes that by
retaining the identity of its acquired companies, it will be able to maximize
its market penetration by combining a local entrepreneurial brand name with the
name and resources of a national company. The Company expects that as it expands
through internal growth and acquisitions, it will be able to take advantage of
economies of scale in purchasing a range of services and products and to
cross-market new products and services to existing clients who do not currently
utilize all of the services the Company offers. The Company provides its
services and products through a network of 82 Company offices in 26 states, as
well as through its subsidiary Comprehensive, a franchisor of accounting
services with approximately 250 franchisee offices located in 40 states.
In addition to the Company's traditional operations, the Company intends to
utilize its Comprehensive network of approximately 250 entrepreneurial
franchisee sales offices to distribute its services and products to the
Comprehensive network's approximately 24,000 customers just as it utilizes its
own offices. The franchisees are able to market to their customers the broad
array of services and products offered by Century. In the process, the
franchisees have the opportunity to enhance customer loyalty, receive
compensation for additional sales and provide additional revenue to both the
Century subsidiary providing the service or product and to Comprehensive as the
franchisor.
None of the Company's major business services groups have a single
homogeneous client base. Rather, the Company'sCBIZ's clients come from a large variety of industries and markets. The CompanyEdward
Jones, a financial services firm and client of CBIZ Network Solutions for
electronic networking and information services, contributed approximately 3.6%
of the Company's revenue in 2002. No other single customer individually
comprises more than 3% of CBIZ's total consolidated revenue. Management believes
that such diversity helps to
insulate itCBIZ from a downturn in a particular
industry. In addition, Century's
clients are focused on quality and quantity of services and established
relationships and are not overly sensitive to price change. Nevertheless, economic conditions among selected clients and groups of
clients may have a
temporaryan impact on the demand for such services.
COMPETITION
The professional outsourced business services industry is a highly fragmented
and competitive, industry, with a majority of industry participants, (suchsuch as accounting,
employee benefits, payroll firms or PEOs)professional employee organizations,
offering only one or a
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8 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 geographic proximity. There are limited barriers to
entry and new competitors frequently enter the market in any one of the
Company's many service areas. The Companycompetitive rates. CBIZ
competes with a small number of multi-location regional or national operators and a
large number of relatively small independent operators in local markets. Some of these competitors, which
include public companies, may have greater financial resources than the Company.
The Company may also face competition for acquisition candidates from these
companies, many of who have acquired a number of various types of business
service providers in recent years.
The Company believes that it will be able to compete effectively based on
its (i) broad range of high quality services and products, (ii) knowledgeable
and trained personnel, (iii) entrepreneurial culture, (iv) large number of
locations, (v) diversity of geographic coverage, (vi) operational economies of
scale and (vii) decentralized operating structure.
The Company'sCBIZ's
competitors in the professional outsourced business outsourcing services industry include
independent consulting services companies, divisions of diversified enterprises,
insurance brokers and banks.
ACQUISITIONS AND DIVESTITURES
Acquisitions are an important part of our strategy. CBIZ is looking to
strengthen our operations and customer service capabilities by making
acquisitions in markets where we currently operate and where the prospects are
favorable to increase our market share and become a significant provider of a
comprehensive range of outsourced business services. In October 2002, CBIZ
acquired a benefits and insurance firm located in the Maryland area.
In 2002, CBIZ sold, closed, or committed to sale sixteen operating entities
in order to rationalize its business operations by divesting business units that
were either underperforming, located in secondary markets, or did not provide
the level of synergistic cross-serving opportunities with other CBIZ businesses
that is desired. These divestitures are consistent with CBIZ's plan to focus on
metropolitan markets in which we can strengthen our ATA and Benefits & Insurance
core service offerings. Going forward, CBIZ may, from time to time, recognize
additional gains and/or losses on divestitures.
REGULATION
The Company'sCBIZ's operations are subject to regulations by federal, state, and local
governing bodies. Accordingly, our outsourced business services are vulnerable tomay be impacted
by legislative law changes by these bodies, particularly with respect to the provision ofprovisions
relating to payroll, employee 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'
procedures 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 procedures
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 the
accounting industry, the interpretation of which may restrict CBIZ's operations.
CBIZ is currently in compliance with laws and workers' compensation designregulations that have been
recently changed or imposed, and administration services. Legislativeis not aware of any proposed changes may expandthat will
have a negative impact on CBIZ's operations, or contract the typesthat CBIZ does not believe it
will be able to comply with.
CBIZ is subject to certain privacy, security, and amounts of business services that are required by individuals and
businesses. There can be no assurance that future laws will provide the same or
similar opportunities to provide business consulting and management services to
individuals and businesses that are provided today by existing laws.
SPECIALTY INSURANCE SERVICES
GENERAL
Through its insurance subsidiaries, Century provides specialty insurance,
bonding services and workers' compensation coverage to small and medium sized
companies throughout the United States. The following is a descriptionelectronic-data
provisions of the specialty insurance, bonding servicesHealth Insurance Portability and workers' compensation programs
currently offeredAccountability Act of 1996
("HIPAA") and corresponding provisions of state law which may restrict CBIZ's
operations and give rise to expenses related to compliance.
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002 to reform the oversight of public company auditing,
improve the quality and transparency of financial reporting by Century.
OPERATIONSthose companies
and strengthen the independence of auditors. The products providednew 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 Century's insurance subsidiaries canthe
Securities Exchange Commission (SEC). The new legislation also accelerates the
required reporting of insider stock transactions, which now generally must be
divided
into three categories of specialty insurance services: commercial liability
lines, which constitute approximately 84.0%reported by the end of the Company's specialty insurance
business; surety bonds, which constitute 13.5%;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 workers' compensation
coverage, which constitutes 2.5%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 Company's specialty insurance business.
In addition, Century employs reinsurance to limit its exposure on policiesaudit
committee includes at least one "financial expert". CBIZ is currently in
compliance with those requirements effective in 2002, and bonds.
COMMERCIAL LINES. Century's commercial product lines operations consist of
approximately 40 different programs for a wide variety of specialty risk groups.
Largest among these are general liability insurance and related coverages for
(i) small construction contractors; (ii) restaurants, bars, and taverns; (iii)
small commercial and retail establishments; and (iv) sun tanning salons.
Century's commercial lines business is produced by a network of
approximately 72 agents (with 104 offices) and 28 brokers (with 28 offices).
Subject to strict and detailed written underwriting guidelines regarding pricing
and coverage limitations published by Century, agents have limited authority to
bind coverage. For casualty coverage, agents may bind and write up to $1.0
million combined single limit of liability for risks other than those on the
list of prohibited classes or on the list for referral to Century. Policies that
are bound by agents are immediately forwarded to Century for review and
inspection, and Century reserves the right to make the final underwriting
decision based on its acceptance or rejection of individual risks. Risks outside
the written guidelines mustbelieves it will be submitted to Century for specific approval for
underwriting. Brokers have no underwriting authority and must submit all risks
to Century for underwriting, quoting, binding and policy insurance.
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Century checks premium ratings on a selective basis to verify that program
rules and rates are being followed. In addition, underwriters perform monthly
reviews of files for renewal risks. Files are reviewed on a selective basis by
policy type, particular risk class, or individual general agent as loss
experience or changing underwriting practices dictate. In addition to other
underwriting quality control measures, a continuous audit process forin
compliance with each
general agent is maintained. At least once a year, a visit to each agent's
office is arranged to review all of the foregoing areas, as well as premium
production, losses and loss ratio. Management also performs internal
underwriting audits of all underwriters on a regular basis to maintain control
of the Company's underwriting quality and pricing.
All claims against commercial policies are managed by Century's claim
departments. Outside adjusters and attorneys are engaged, as necessary, to
supplement the Company's in-house staff and to represent the Company in
litigation over disputed claims. Claims guidelines are in place on all programs.
State regulations and data on unfair claims practices are also provided to the
staff members as necessary and appropriate. Century's philosophy is to pay valid
claims as expeditiously as possible but to resist firmly what management
believes are unjust and fraudulent claims. In an effort to provide adequate
resources to the claims staff, CSC became a member of the Property Loss Research
Bureau and the Liability Insurance Research Bureau in 1995. Century also submits
claim data to the index bureaus of the American Services Insurance Group and the
Property Insurance Loss Register.
It is the responsibility of the claims manager to appoint outside adjusting
firms to work on behalf of the Company. These firms, however, are given no
authority to settle any claims without Century's prior agreement. The internal
adjuster assigned to each individual claim determines, after coverage is
analyzed, whether the claim can be handled in house or should be assigned to an
outside firm.
SURETY BONDING. Century's surety bonding operations consist of two major
programs: contract surety bonds for construction contractors (with work programs
typically ranging from $250,000 to $10.0 million per year) and bonds for the
solid waste industry, including waste haulers and landfill operators. The
Company also writes a small number of bail bonds.
Contract surety consists of bonds that government authorities and some
private entities require construction contractors to post to provide assurance
that contract work will be performed timely, to specification, on budget, and
without encumbrance from suppliers or subcontractors who may have lien rights
for non-payment. Contract surety business is underwritten by Century subject to
authority defined in agency agreements with the insurance companies. The
business is produced by approximately 100 appointed agents, who have limited
authority to bind Century's insurance subsidiaries in accordance with specific
guidelines established by Century. Because the contract surety business is
specialized in smaller, newer and more difficult accounts, underwriters take
collateral, require contract funds control, and take other risk control measures
considered extraordinary by standard market sureties. In virtually all cases,
bond principals indemnify the surety against loss with their personal as well as
corporate assets.
Once bonds are issued, the Company continues to review all projects to
determine job progress, bill payment, and other factors. Century maintains
real-time records of all bonded exposures, amended as appropriate, in an effort
to obtain the most current possible assessment of exposures for each account and
to avoid excessive exposure on any one account. Century also strives through its
review procedures to provide Century's insurance subsidiaries with the earliest
possible notice of potential difficulty so that claim resources can be brought
to bear at the earliest possible stage in an effort to mitigate losses.
While claims against surety bonds are managed by the Company, outside
counsel are engaged to handle surety defense litigation. In addition, Century
has or has access to completion capability for finishing bonded
work which bonded principals are unable to complete, and pursues recoveries on
behalf of Century's insurance subsidiaries from principals who have defaulted on
bond obligations. Such recovery efforts range from execution on collateral
posted by bonded principals to indemnity litigation to recover surety losses
from indemnitors' business and personal assets.
The Company's solid waste bond program, which is national in scope, is
primarily written directly by Century, and serves bond accounts that are
generally much larger than those handled by Century's contract surety program.
The primary focus of this program is bonds for landfill closure and post-closure
care required by states
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in accordance with Subtitle D of the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"). These bonds are designed to assure that non-hazardous
solid waste landfills will be closed when their useable airspace is exhausted in
accordance with RCRA closure requirements (or such higher standards as
individual states may impose) and that the sites will be maintained in
accordance with RCRA standards for a period of at least 30 years after closure.
Management believes that this program is one of only a few landfill bond
programs in the United States, although bank letters of credit and other devices
may be used to satisfy RCRA financial assurance requirements. See "--
Regulation." The Company currently writes landfill bonds for some of the larger
solid waste disposal firms in the country. As a companion to the landfill
closure bonds, Century also writes bonds required of waste haulers to assure the
observance of terms of their contracts with the local communities from which
they collect waste.
To stay abreast of technical and market developments in the surety
industry, certain of Century's subsidiaries are members of the Surety
Association of America, the National Association of Independent Sureties,
National Association of Surety Bond Producers, the Surety Federation of Ohio,
and the American Surety Association, on which Board of Directors CSC occupies a
position.
WORKERS' COMPENSATION SERVICES. Each state requires employers to provide
workers' compensation coverage for employees. The Company's workers'
compensation program includes fully issued workers' compensation coverage as
well as other services. The Company's services vary from state to state;
however, it generally provides employers with an integrated system of actuarial
analysis and underwriting capabilities with claims administration. Century has
the capability to market workers' compensation products in three states.
Professional administration can offer clients sizable savings by controlling the
costs of premiums, claims and risks. Services include: deductible programs
available to further reduce costs, claims preparation and filing, expert claims
management and loss control, medical referral network for employees, multi-state
coverages, OSHA compliance and record keeping, OSHA 200 logs preparation,
certificates of insurance, loss prevention strategies, free fraud investigation,
safety program development consultation, workers' compensation audits and
classification analysis for compliance.
REINSURANCE. Century employs reinsurance to limit its exposure on the
policies and bonds it has written. The Company utilizes several different
reinsurance programs to cover its exposure, including "treaties" that cover all
business in a defined class and "facultative" reinsurance that covers individual
risks. The Company generally retains from $50,000 to $200,000 of each commercial
line anticipated risk, depending on the program. Surety retentions may go as
high as $1.0 million or more, but typically are less than $250,000.
Numerous domestic and international reinsurers support these various
programs in different combinations. Generally, the Company's reinsurers are
rated A- or better by A.M. Best, a leading rating agency of insurance companies
and reinsurers, and demonstrate capital and surplus in excess of $80.0 million
(collectively in excess of $10.0 billion). Cessions are diversified so that
every reinsurance treaty (i.e., excluding facultative arrangements) is supported
by more than one reinsurer and no reinsurer is participating in all of Century's
reinsurance programs.
MARKETING
Other than the workers' compensation program, Century's insurance and
bonding business is focused on niche insurance and surety coverages known in the
insurance business as "non-standard" or specialty coverages. These terms refer
to risks regarded as higher than standard or normal risks and to risk groups
regarded as too small or too specialized to permit profitable underwriting by
larger, "standard market" insurance companies. In general, non-standard
insurance and bonds are more expensive, and coverage more limited, because of
perceived additional risk associated with this type of business. Century
attempts to identify and exploit such niches in the non-standard insurance
market where management believes the actual risk is significantly less than the
perceived risk at which the coverage is defined and priced, or where the Company
(because of its smaller size and lower overhead) is able to underwrite coverages
more economically than larger carriers.
Many non-standard insurance products can be marketed on an excess and
surplus lines basis, which means that the carrier is not fully admitted in a
given state but instead satisfies a less restrictive threshold of regulatory
scrutiny, known as "eligibility," to write excess and surplus lines ("E&S"). E&S
eligibility offers much more
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flexibility than admitted carriers enjoy. For example, E&S eligibility offers
certain marketing advantages, principally exemption from rate and form filing
requirements that apply to admitted carriers, which permits E&S carriers to
adjust prices and coverages more quickly than admitted carriers, or to cease
writing altogether. Accordingly, the majority of the non-surety business of the
Company is written on an E&S basis. Through certain of its subsidiaries, Century
is admittedbecome effective in
36 states, but is eligible to write on an E&S basis in 40 states
plus the District of Columbia, the most significant of such states being
California, Texas and Florida.
Where competitive or regulatory requirements necessitate the use of
admitted carriers, Century uses its admitted subsidiaries, thereby reaching a
market of 36 states. Management believes that this strategy of employing both
admitted and non-admitted E&S carriers helps to maximize the Company's
flexibility within the insurance regulatory environment in an effort to market a
broad range of products on a profitable basis. Century also employs reinsurance
arrangements to market certain products in all 50 states.
POTENTIAL COMPETITION
Both the commercial lines and the surety industries have been highly
competitive in recent years, resulting in the consolidation of some of the
industries' largest companies. Competition is particularly acute for smaller,
specialty carriers like Century because the market niches exploited by Century
are small and can be penetrated by a large carrier that elects to cut prices or
expand coverage. The Company has endured this risk historically by maintaining a
high level of development of new products, eschewed by most major carriers.
CUSTOMERS
Century provides specialty insurance services to approximately 6,000
clients through a network of nearly 200 agents. The Company attempts to maintain
diversity within its client base to lower its exposure to downturns or
volatility in any particular industry and help insulate the Company to some
extent from general economic cyclicality. All prospective customers are
evaluated individually on the basis of insurability, financial stability and
operating history. No customer individually comprises more than 3.0% of the
total consolidated revenue of the Company.
REGULATION
FEDERAL REGULATION. Century's specialty insurance operations are
vulnerable to both judicial and legislative law changes. Judicial expansion of
terms of coverage can increase risk coverage beyond levels contemplated in the
underwriting and pricing process.
At the same time, coverages that are established by statute may be
adversely affected by legislative or administrative changes of law. Most surety
bonds exist because they are required by government agencies. When governments
change the threshold for requiring surety, the market for surety bonds is
directly affected.
Approval by the U.S. Department of the Treasury ("Treasury") and Treasury
listing as an approved surety is required for the Company's Surety Bond Program.
Century Surety Company and Evergreen National Indemnity Company ("Evergreen")
are currently approved and listed "Companies Holding Certificates of Authority
as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies"
by the Treasury Department Circular 570, effective July 1, 1997.
STATE REGULATION. The companies of the CSC Group are subject to regulation
and supervision by state insurance regulatory authorities, most comprehensively
for each insurance company in its state of incorporation, but also in other
states where the Companies are admitted or eligible to write E & S lines. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Sources of Cash." These regulatory bodies have broad administrative
powers relating to (i) standards of solvency, which must be met on a continuing
basis; (ii) granting and revoking of licenses; (iii) licensing of agents; (iv)
approval of policy rates and forms; (v) maintenance of adequate reserves; (vi)
form and content of financial statements; (vii) types of investments permitted;
(viii) issuance and sale of stock; and (ix) other matters pertaining to
insurance. See Footnote 9 to the Consolidated and Combined Financial Statements
contained herein.
Each of the CSC Group companies is required to file detailed annual
statements with the applicable state regulatory bodies and is subject to
periodic examination by the regulators. The most recent regulatory
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examinations for CSC and Evergreen were made as of December 31, 1993. Regulatory
review by the Ohio Department of Insurance for each of CSC and Evergreen for the
year ended December 31, 1996 is currently in progress. The most recent triennial
regulatory examination of Continental Heritage Insurance Company ("Continental
Heritage"), a subsidiary of CSC, by the Utah Department of Insurance was as of
December 31, 1994.
ENVIRONMENTAL SERVICES
GENERAL
In July, 1997, the Company sold the majority of its environmental services
operations, and in September 1997 sold its remaining environmental operations.future periods.
LIABILITY INSURANCE
AND BONDING
CenturyCBIZ carries commercial general liability insurance, automobile
liability insurance, workers' compensation, and employer's liability insurance
as required by law in the various states in which operations are conducted and
umbrella policies to provide excess limits of liability over the underlying
limits contained in the commercial general liability, automobile liability,
professional liability, directors and employer'sofficers liability, fiduciary liability,
employment practices liability and workers' compensation subject to prescribed
state mandates. Excess liability is carried over the underlying limits provided
by the commercial general liability and automobile liability policies. See "Legal Proceedings."
EMPLOYEES
At December 31, 1997, Century2002, CBIZ employed approximately 1,200 employees.4,900 employees,
approximately half of whom are professionals. The Company considers its relationshipsbelieves that it has a
good relationship with its employees. CBIZ realizes that as a professional
services company that differentiates itself from competitors through the quality
and diversity of our service offering, the Company's employees are our most
important asset. Accordingly, CBIZ strives to be good.remain competitive as an employer
while increasing the capabilities and performance of our employees.
SEASONALITY
A disproportionately large amount of CBIZ's revenue occurs in the first
half of the year. This is due primarily to the Company's accounting and tax
practice, which is subject to seasonality related to the heavy volume in the
first four months of the year. CBIZ's ATA group generated approximately 44% of
its revenue in the first four months of 2002. Like most professional service
companies, most of CBIZ's operating costs are fixed, resulting in much higher
operating margins in the first half of the year.
PROPERTIES
Century'sCBIZ's corporate headquarters isare located in Valley View, Ohio in leased
premises. The Company has completed negotiations to lease a 14,000 square foot
portion of an office building in Independence, Ohio and will relocate its
headquarters toat 6480 Rockside Woods Blvd.,
South, Suite 330, Cleveland, Ohio 44131, during the first quarterin leased premises. Some of 1998. Certain of theCBIZ's
property and equipment of
the Company are subject to liens securing payment of portions of the
indebtedness of
the CompanyCBIZ and its subsidiaries. The Company'sCBIZ and its subsidiaries also lease 74more than 160 offices
in 2633 states and certainone 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 their equipment. The Companyleases we currently hold. CBIZ believes that itsour
current facilities are sufficient for itsour needs.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Company's subsidiariesUNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Annual Report, including without limitation, "Business and
Properties" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding CBIZ's financial position, business strategy
and plans and objectives for future performance are partiesforward-looking statements.
You can identify these statements by the fact that they do not relate strictly
to legal proceedings, which have
arisen,historical or current facts. Forward-looking statements are commonly
identified by the use of such terms and phrases as "intends," "believes,"
"estimates," "expects," "projects," "anticipates," "foreseeable future,"
"seeks," and words or phases of similar import in connection with any discussion
of future operating or financial
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 ordinary2002
Annual Report and in any other public statements that we make, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Such forward-looking statements can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned in the discussion below will be important
in determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. Also note that we provide
the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses. These are factors that we
think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect operating or financial performance. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
RISK FACTORS
The following factors may affect our actual operating and financial results
and could cause results to differ materially from those in any forward-looking
statements. There may be other factors, and new risk factors may emerge in the
future. You should carefully consider the following information.
WE ARE DEPENDENT ON THE CURRENT TREND OF OUTSOURCING BUSINESS SERVICES.
Our business and growth depend in large part on the trend toward
outsourcing business services. We can give you no assurance that this trend in
outsourcing will continue. Current and potential customers may elect to perform
such services with their own employees. A significant reversal of, or a decline
in, this trend would 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.
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 these economic conditions. Any of
these factors could cause our quarterly results to be lower than expectations of
securities analysts, which could result in a decline in the 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.
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 accrue for potential bad debts each month and recognize
additional reserves against bad debts as we deem it appropriate. Notwithstanding
these measures, our customers may face unexpected circumstances that adversely
impact their ability to pay their trade receivables or note obligations to us
and we may face unexpected losses as a result.
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WE ARE DEPENDENT ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY
EMPLOYEES.
Our success depends in large part upon the abilities and continued services
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 will 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 audit and attest services, other than internal audit
services. However, we maintain joint-referral relationships with independent
licensed CPA firms under which audit and attest services may be provided to
CBIZ's clients. Under these service agreements, we provide administrative
services and lease staff in exchange for a fee. Revenue from these agreements is
reflected in our financial statements.
With respect to attest firm clients that are required to file audited
financial statements with the SEC, the SEC staff views us and the attest 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, 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:
- holding any financial interest in an SEC-reporting attest client;
- entering into any business relationship with an SEC-reporting attest
client; or
- selling any prohibited non-audit services to an SEC-reporting attest
client.
In addition, under these rules, the SEC staff views an attest firm and us
as lacking independence with respect to:
- an 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 in 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.
CBIZ and the attest firms with 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 applicable standards.
These procedures include independence screening in connection with the selection
of attest clients as well as periodic confirmations of independence by officers,
directors and professionals of us and the attest firms. We remain in contact
with state accountancy regulators in jurisdictions in which we operate 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.
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 associations will not extend current restrictions on the profession
to include private companies. To the extent that licensed CPA firms for whom we
provide administrative and other services are affected, we may experience a
decline in fee revenue from these businesses as well. To date, revenues derived
from providing services in connection with attestation engagements of the attest
firms performed for SEC-reporting clients have not been material.
GOVERNMENTAL REGULATIONS AND INTERPRETATIONS ARE SUBJECT TO CHANGES.
Laws and regulations often result in changes in the amount or the type of
business services required by businesses and individuals. We cannot be sure that
future laws and regulations will provide the same or similar opportunities for
us to provide business consulting and management services to businesses and
individuals. Accordingly, CBIZ's ability to continue to operate in some states
may depend on our flexibility to modify our operational structure in response to
these changes in regulations.
WE ARE SUBJECT TO RISK AS IT RELATES TO PROCESSING CUSTOMER TRANSACTIONS FOR
OUR PAYROLL, MEDICAL PRACTICE MANAGEMENT, PROPERTY TAX MANAGEMENT, AND CERTAIN
OTHER TRANSACTION PROCESSING BUSINESSES.
The high volume of client funds processed by us in our payroll and certain
other businesses entails risks for 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 license software from third parties, much of which is integral to our
systems and our business. The licenses are terminable if we breach our
obligations under the license agreements. If any of these relationships were
terminated or if any of these parties were to cease doing business or cease to
support the applications we currently utilize, we may be forced to spend
significant time and money to replace the licensed software. However, we cannot
assure you that the necessary replacements will be available on reasonable
terms, if at all.
WE COULD BE HELD LIABLE FOR ERRORS AND OMISSIONS.
All of our professional business services entail an inherent risk of
professional malpractice and other similar claims. Therefore, we maintain errors
and omissions insurance coverage. Although we believe that our insurance
coverage is adequate, we cannot be certain that actual future claims or related
legal expenses would not exceed the coverage amounts. If we have a large claim
on our insurance, the rates for such insurance may increase, but contractual
arrangements with clients may constrain our ability to incorporate such
increases into service fees. Such insurance rate increases, as well as any
underlying claim, could have a material adverse effect on our business,
financial condition and results of operations.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER OUR OPERATIONS.
As of March 24, 2003, the following groups 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.
Because of their business.stock ownership, these persons can substantially influence
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.
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 95 million shares.
More than 47 million of these shares have been issued in connection with
acquisitions. As part of many acquisition transactions, the shares were
contractually restricted from sale for periods up to two years, most of which
had expired by the end of 2001. As of March 24, 2003, 177,000 shares of common
stock were under lock-up contractual restrictions. We cannot be sure when sales
by holders of our stock will occur, how many shares will be sold or the effect
that sales may have on the market price of our common stock. As of March 24,
2003, 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;
- 15 million shares of our common stock, all 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.
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 acquisition in 2002, it is possibleour intention to
selectively acquire businesses that losses exceeding amounts already reservedare 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, will perform as expected or will contribute significant
revenues or profits. In addition, we may be incurred upon ultimate
resolution of these matters, managementalso 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
available under the 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
prohibit 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 8 to CBIZ's consolidated financial
statements included herewith.
12
THE OUTSOURCING INDUSTRY IS COMPETITIVE AND FRAGMENTED.
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 consolidation of many large companies that may have
greater financial, technical, marketing and other resources than us. In addition
to these new large companies, we face competition in the outsourced business
services industry from in-house employee services departments, local outsourcing
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 losses, if any,trends in a timely manner. We cannot
be certain that we will be able to compete successfully against current and
future competitors, or that competitive pressure will not have a material
adverse effect on our business, financial condition and results of operations.
CBIZ makes available, free of charge on its website, www.cbiz.com, through
the Company's business or financial
position; however, unfavorable resolutionInvestor Information pages, its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to all those
reports as soon as reasonably practicable after CBIZ files (or furnishes) such
reports to the U.S. Securities and Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
Since September 1999, seven purported stockholder class-action lawsuits
filed against CBIZ and certain of each matter individually orour current and former directors and officers
were consolidated as In Re Century Business Services Securities Litigation, Case
No. 1:99CV2200, in the aggregate could affectUnited States District Court for the consolidatedNorthern District of
Ohio. The plaintiffs alleged that the named defendants violated certain
provisions of the Securities Exchange Act of 1934 and certain rules promulgated
thereunder in connection with certain statements made during various periods
from February 1998 through January 2000 by, among other things, improperly
amortizing goodwill and failing to adequately monitor changes in operating
results. The United States District Court dismissed the matter with prejudice on
June 27, 2002. The matter was appealed by the plaintiffs to the Sixth Circuit
Court of Appeals. No decision has been rendered on the appeal.
CBIZ and the named officer and director defendants deny all allegations of
wrongdoing made against them in these actions and intend to continue vigorously
defending this matter. Although the ultimate outcome of such litigation is
uncertain, based on the allegations contained in the complaints and the
carefully considered judgment of the District Court in dismissing the case,
management does not believe that these lawsuits will have a material adverse
effect on the financial condition, results of operations foror cash flows of CBIZ.
In addition to the quarterly
periodsabove-disclosed items, CBIZ is from time to time subject
to claims and suits arising in which they are resolved.the ordinary course of business. Although the
ultimate disposition of such proceedings is not presently determinable,
management does not believe that the ultimate resolution of these matters will
have a material adverse effect on the financial condition, results of operations
or cash flows of CBIZ.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of CBIZ's stockholders during the
fourth quarter of 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 common stock of CBIZ is quoted on the Nasdaq National Market under the
trading symbol "CBIZ". The table below sets forth the range of high and low
sales prices for the 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
On October 28,December 31, 2002, the last reported sale price of CBIZ's Common Stock
as reported on the Nasdaq National Market (Nasdaq Amex-Online) was $2.65 per
share. As of February 21, 2003, CBIZ had 8,844 holders of record of its common
stock, and the last sale of CBIZ's common stock as of that date was $2.75.
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's
Board of Directors decides on the payment and level of dividends on common
stock. The Board of Directors' decision is based among other things on results
of operations and financial condition. In addition, CBIZ's credit facility
contains a requirement for lender consent prior to the declaration of any
dividends. CBIZ currently intends to retain future earnings to finance the
ongoing operations and growth of the business. Any future determination as to
dividend policy will be made at the discretion of the Board of Directors 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.
14
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. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of CBIZ and the notes thereto, which are
included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
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 general and administrative............ 19,672 19,797 24,694 19,138 5,155
Depreciation 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) on sale 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 of change in accounting
principle, net of tax........................... (80,007) -- (11,905) -- --
-------- -------- --------- -------- --------
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:
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 cumulative 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
- ---------------
(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
The following discussion is intended to assist in the understanding of
CBIZ's financial position and results of operations for each of the years ended
December 31, 2002, 2001 and 2000. This discussion should be read in conjunction
with CBIZ's consolidated financial statements and notes thereto included
elsewhere in this Annual Report.
RECENT DEVELOPMENTS
During 2002, CBIZ rationalized and sharpened the focus of its operations 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-strategic businesses that are either
under-performing, are located in secondary markets, or that do not provide the
level of synergistic cross-serving opportunities with other CBIZ businesses that
is desired. Although we cannot predict the proceeds for certain units or the
resulting gain or loss, additional gains/losses 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 presence in the Maryland area.
OPERATING PRACTICE GROUPS
CBIZ currently delivers products and services through three practice
groups. Below is a brief description of these groups' operating results and
factors affecting their businesses. The services offered under each of these
groups are described in Part I of this report.
Accounting, Tax and Advisory Services. The ATA group contributed
approximately $209.9 million and $231.4 million of revenue, or approximately 42%
and 45% of CBIZ's annual revenue in 2002 and 2001, respectively. The decrease in
revenue attributable to divestitures completed during the year ended December
31, 2002 was $11.0 million. For ATA businesses with a full period of operations
for the year ended December 31, 2002, revenue decreased $10.5 million, or 4.5%.
This decrease in same-unit revenue was primarily driven by the decrease for the
demand in discretionary work, such as consulting projects and special work
related to business transactions related to mergers and acquisitions, and a weak
economy. These decreases in revenue caused a decrease in gross margin from 14.7%
in 2001 to 13.3% in 2002. CBIZ expects its ATA Services group to achieve modest
revenue growth, as well as improvement 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.
Benefits and Insurance Services. The Benefits and Insurance group
contributed approximately $150.5 million and $141.3 million of 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
by the decrease in revenue related to divestitures completed during the year
ended December 31, 2001 of $5.0 million. For Benefits and Insurance businesses
with a full period of operations for the year ended December 31, 2002, same-unit
revenue increased $14.2 million, or 10.0%. 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 related to several areas, including the information
technology (IT) area, valuation and property tax services, and government
relations. This was offset by improvement in health care consulting and
improvement in CBIZ's Mergers & Acquisition Group. The increase in capital
management revenues was primarily affected by one significant transaction in the
fourth quarter, the sale of its clients Floors, Inc., Arvada Hardwood Floor Co.
and Floorworks Inc. to the Home Depot. Gross margins for other National
Practices decreased from 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 nature in our mergers and acquisition business, we are not
able to predict the timing or amount of these types of transactions, nor are we
able to determine if they will continue in the future. CBIZ does expect modest
growth in revenue for the other National Practices, as well as margin
improvement.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Revenues
Total revenue for the year ended December 31, 2002 was $504.3 million as
compared to $516.9 million for the year ended December 31, 2001, representing a
decrease of $12.6 million, or 2.4%. The decrease in revenue attributable to
divestitures completed during the year ended December 31, 2002 was $24.1
million. For business units with a full period of operations for the year ended
December 31, 2002 revenue increased $11.6 million or 2.3%. A more comprehensive
analysis of revenue is discussed above by operating practice groups.
Expenses
Operating expenses decreased to $445.7 million for the year ended December
31, 2002, from $447.5 million for the comparable period in 2001, representing a
decrease of $1.8 million. The decrease was primarily attributable to the
divestiture of low-margin businesses, as well as expense reductions initiated in
the second quarter of 2002 to help bring compensation expenses back in line with
revenue levels. Compensation expense (excluding severance), which represents
approximately 71% of operating expenses, decreased by $8.0 million, or 2.5%.
These cost reductions were offset by charges for severance, restructuring and
inventory adjustments. As a result of expense reductions and continuing
consolidation activities, CBIZ incurred severance and restructuring costs of
$4.6 million for the year ended December 31, 2002, an increase of $2.4 million.
In addition, CBIZ incurred a $1.3 million expense charge related to a valuation
and obsolescence adjustment for inventory carried to support IT network
maintenance contracts that have been recently terminated. As a percentage of
revenue, operating expenses for the year ended December 31, 2002 were 88.4%
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 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. As a percentage of
revenue, depreciation and amortization expense (excluding goodwill amortization)
decreased to 4.1% for the year ended December 31, 2002 from 3.6% for the
comparable period in 2001.
Interest expense decreased to $2.5 million for the year ended December 31,
2002, from $6.8 million for the same period in 2001, a decrease of $4.3 million,
or 63.5%. The decrease is the result of both lower average outstanding debt
balances and a lower average interest rate in 2002. The average debt balance was
$38.6 million for the year ended December 31, 2002 compared to $84.7 million for
the year ended December 31, 2001. The weighted average interest rate on bank
debt was 5.6% for the year ended December 31, 2002 compared to 7.6% for the same
period in 2001.
CBIZ recorded a net gain from divested operations of $0.9 million for the
year ended December 31, 2002, as compared to a net loss of $7.1 million for the
year ended December 31, 2001. CBIZ completed the divestiture of eleven non-core
business operations during the year ended December 31, 2002, either through sale
or closure. During 2001, the net loss was attributable to the divestiture of
fifteen non-core operations. CBIZ also recorded in 2001 a loss on the planned
divestiture of four non-core business units for 2002, based on estimated
proceeds. In addition to this divestiture activity, CBIZ classified five
operations as discontinued operations during 2002, in connection with the
adoption of Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The results of these
operations are disclosed separately on the consolidated financial statements and
discussed separately under "Results of Operations -- Discontinued Operations"
below.
Other income (expense), net was $1.1 million of expense for the year ended
December 31, 2002, as compared to $3.9 million of income for the comparable
period in 2001, representing a change of approximately $5.0 million. Other
income (expense), net is comprised primarily of interest income earned in CBIZ's
payroll business, gains and losses on the sale of assets, charges for legal
reserves and settlements, and miscellaneous income, such as contingent royalties
from previous divestitures. The decrease in other income (expense), net is
primarily attributable to a $2.4 million charge related to the write-down of
CBIZ's investment in two high-tech start-up ventures, and a note taken in
connection with the divestiture of the hazardous waste operation in 1997, that
were deemed impaired in 2002. In addition, interest income decreased $1.3
million related to lower interest rates in 2002.
CBIZ recorded income tax expense from continuing operations of $8.1 million
for the year ended December 31, 2002, compared with $12.2 million in 2001. The
effective tax rate was 51.8% for the year ended December 31, 2002. The effective
tax rate for the year ended December 31, 2002, is higher than the statutory
federal and state tax rates of approximately 40% due to permanent differences
such as non-deductible goodwill related to the disposition of businesses. The
effective tax rate 2001 is higher than the statutory rates primarily due to the
significant amount of goodwill amortization expense, the majority of which is
not deductible for tax purposes.
18
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Revenues
Total revenue for the year ended December 31, 2001 was $516.9 million as
compared to $551.2 million for the year ended December 31, 2000, representing a
decrease of $34.3 million, or 6.2%. The decrease in revenue was primarily
attributable to (i) divestitures completed during the year ended December 31,
2001, and (ii) lower than expected revenue resulting from generally weak
economic conditions. The decrease in revenues attributable to divestitures was
$30.9 million. For business units with a full period of operations for the years
ended December 31, 2001 and 2000, revenue decreased $3.4 million. For the period
of September through December, the company experienced lower revenues in most of
its business units due to weak economic conditions. Lower revenues were
particularly significant 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 revenue from these business units
declined by $6.1 million, or 30.7% compared to the fourth 2000.
Expenses
Operating expenses decreased to $447.5 million for the year ended December
31, 2001, 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
expenses for the year ended December 31, 2001 were 86.6% compared to 89.0% for
the year ended December 31, 2000, representing a decrease of 2.4%.
Corporate general and administrative expenses decreased to $19.8 million
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%. Such decrease
was attributable to lower personnel costs of $1.2 million and lower technology
expenditures of $2.8 million. Corporate general and administrative expenses
represented 3.8% of total revenues 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 for the
year ended December 31, 2001, from $43.3 million for 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 recorded in the fourth quarter of 2000 and a
reduction in goodwill related to divestures completed in 2000 and 2001. The
decrease was primarily offset by an increase in depreciation expense related to
capital expenditures, a significant amount of which occurred in 2000, which were
primarily related to consolidation efforts. As a percentage of revenue,
depreciation and amortization expense increased to 7.9% for the year ended
December 31, 2001 from 7.9% for the comparable period in 2000.
Interest expense decreased to $6.8 million for 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 of 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 related 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 additional 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 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 ended
December 31, 2001, as compared to $5.8 million of expense 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 ended 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. These
operations were classified as discontinued operations in connection with the
adoption of Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," and the net assets and
liabilities and results of operations are reported separately in the
consolidated financial statements. Four 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 loss
on disposal from discontinued operations, net of tax, of $2.5 million for the
year ended December 31, 2002. Revenue associated with these five discontinued
operations for the years ended December 31, 2002, 2001 and 2000 was $7.2
million, $10.0 million and $16.6 million, respectively. The loss from
operations, net of tax, associated with these divestitures for the years ended
December 2002, 2001 and 2000 was $1.9 million, $2.8 million and $15.8 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
Total assets were $433.1 million and total liabilities were $138.8 million
as of December 31, 2002 and shareholders equity was $294.3 million. Current
assets of $202.7 million exceeded current liabilities of $116.4 million by $86.3
million at December 31, 2002.
Cash and cash equivalents increased $2.0 million to $6.4 million for the
year ended December 31, 2002. Restricted cash was $17.0 million at December 31,
2002, an increase of $3.6 million from a year ago. Restricted cash represents
those funds held in connection with CBIZ's NASD regulated operations and funds
held in connection with the pass through of insurance premiums to the carrier.
As further described in note 1 to the consolidated financial statements
contained herein, funds held for clients were $49.2 million, which is directly
offset by client fund obligations. Cash, restricted cash and funds held for
clients fluctuate during the year based on the timing of cash receipts and
related payments. Accounts receivable were $103.0 million at December 31, 2002,
and declined by $9.7 million from a year ago. The decline in receivables was due
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. Goodwill and other intangible assets, net
of accumulated amortization, decreased $83.4 million, primarily due to
impairment for goodwill of $88.6 million recorded in 2002 as a result of the
adoption of SFAS 142.
The accounts payable balance of $22.5 million at December 31, 2002 reflects
amounts due to suppliers and vendors. Other current liabilities increased $5.3
million to $37.7 million at December 31, 2002. The change primarily reflects the
recording of anticipated costs related to restructuring and accrued 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 $17.5 million at December 31, 2002, a reduction of $37.5
million from December 31, 2001. The reduction in debt was a result of CBIZ's
positive cash flow generated during 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities 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.
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, 2002 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 $0.4 million in cash was used toward the purchase of
170,000 shares of CBIZ's common stock, in accordance with CBIZ's Share
Repurchase Program approved by the Board of Directors on August 8, 2001
SOURCES OF CASH
CBIZ's principal source of net operating cash is derived from the
collection of fees from professional services rendered to its clients and
commissions earned in the areas of 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, 2002 CBIZ entered into a new senior secured credit
agreement with a group of four banks. The new $73 million facility carries an
option to increase the facility to $80 million and allows for the allocation of
funds for strategic initiatives, including acquisitions and the repurchase of
CBIZ stock. CBIZ expects to use the facility for working capital, internal
growth initiatives, and its acquisition program. The facility has a three year
term with an expiration date of September 2005. The new credit agreement is
secured by all assets and 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. Under the new credit agreement, CBIZ is
subject to a monthly borrowing base related to accounts receivable and unbilled
revenues, and is required to meet certain financial covenants. These covenants
require CBIZ to meet certain requirements with respect to (i) minimum tangible
net worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge
coverage ratio. CBIZ is in compliance with its covenants as of December 31, 2002
and projects that it will remain in compliance in 2003.
At December 31, 2002, CBIZ had $17.5 million outstanding under its credit
facility. Management believes that the available funds from the credit facility,
along with cash generated from operations, will be sufficient to meet its
liquidity needs in the foreseeable future.
See note 8 to CBIZ's consolidated financial statements included herewith.
USES OF CASH AND LIQUIDITY OUTLOOK
CBIZ's capital expenditures from continuing operations totaled $8.2
million, $12.7 million 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,
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 we can offer such securities. See note 12 to the
consolidated financial statements contained herein for a description of the
aforementioned registration filings.
CBIZ's aggregate amount of obligations for the next five years and
thereafter is set forth below (in thousands):
2003 2004 2005 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 --
Obligations 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
======= ======= ======= ======= ======= =======
INTEREST RATE RISK MANAGEMENT
CBIZ entered into an interest rate swap agreement in the third quarter of
2001 to reduce the impact of potential rate increases on variable rate debt
through its credit facility. The interest rate swap was entered into with 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 accounts for the interest rate swap as a cash flow hedge, whereby
the fair value of the interest rate swap is reflected as an asset or liability
in the accompanying consolidated balance sheet. The interest rate swap (hedging
instrument) matches the notional amount, interest rate index and re-pricing
dates as those that exist under the variable rate debt through its credit
facility (hedged item). When the interest rate index is below the fixed rate
LIBOR, the change in fair value of the instrument represents a change 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
The policies discussed below are considered by management to be critical to
the understanding of CBIZ's consolidated financial statements because their
application places significant demand on management's judgment, with financial
reporting results relying on estimation about the effects of matters that are
inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these policies, management
cautions that estimates may require adjustment if future events develop
differently than forecasted.
REVENUE RECOGNITION AND VALUATION OF UNBILLED REVENUES
Revenue is recognized only when all of the following are present:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, our fee to the client is fixed or determinable, and
collectibility is reasonably assured, which is in accordance with GAAP and SAB
101. CBIZ offers a vast array of products and outsourced business services to
its clients. Those services are delivered through three practice groups. A
description of revenue recognition, as it relates to those groups, is provided
below:
ACCOUNTING, TAX AND ADVISORY SERVICES -- Revenue consists primarily of fees
for accounting services, preparation of tax returns and consulting services.
Revenues are recorded in the period in which they are earned. CBIZ bills clients
based upon a predetermined agreed-upon fixed fee or actual hours incurred on
client projects at expected net realizable rates per hour, plus any
out-of-pocket expenses. The cumulative impact on any subsequent revision in the
estimated realizable value of unbilled fees for a particular client project is
reflected in the period in which the change becomes known.
23
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans. A
description of the revenue recognition, based on 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 -- The business units that comprise this practice group
offer a variety of services. A description of revenue recognition associated
with the primary services is provided below:
- Mergers & Acquisitions and Capital Advisory -- Revenue associated with
non-refundable retainers are recognized on a pro rata basis over the life
of the engagement. Revenue associated with success fee transactions are
recognized when the transaction is completed.
- Technology Consulting -- Revenue associated with hardware and software
sales are recognized upon delivery and acceptance of the product. Revenue
associated with installation and service agreements are recognized as
services are performed. Consulting revenue is recognized on an hourly or
per diem fee basis.
- 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
The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Specifically, management must make estimates of the
collectability of our accounts receivable, including unbilled accounts
receivable, related to current period service revenue. Management analyzes
historical bad debts, client credit-worthiness, 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, CBIZ adopted the non-amortization provisions of
SFAS 142, and accordingly ceased amortization of our remaining goodwill balance.
CBIZ evaluated the goodwill for impairment using the new fair value impairment
guidelines 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. This change to a new method of accounting for goodwill resulted in a
non-cash impairment charge of $88.6 million on a pretax basis ($80.0 million net
of tax), which was recorded as a cumulative effect of a change in accounting
principle.
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 is 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 that the fair value of these investments could decline in future
periods, and further impairment could occur.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as
liabilities when it is probable that a liability has been incurred and the
amount of the loss is reasonably estimable. Contingent liabilities are often
resolved over long time periods. Estimating probable losses requires analysis
that often depends on judgment about potential actions by third parties.
ESTIMATES OF INCENTIVE COMPENSATION COSTS AND EFFECTIVE INCOME TAX RATES
Incentive compensation costs and income tax expense are two significant
expense categories that are highly dependent upon management estimates and
judgments, particularly at each interim reporting date. In arriving at the
amount of expense to recognize, management believes it makes reasonable
estimates and judgments using all significant information available. Incentive
compensation costs are accrued on a monthly basis, and the ultimate
determination is made after our year-end results are finalized; thus, estimates
are subject to change. Circumstances that could cause our estimates of effective
income tax rates to change include the impact of information that subsequently
became available as we prepared our corporate income tax returns; the level of
actual pre-tax income; revisions to tax positions taken as a result of further
analysis and consultation, and changes mandated as a result of audits by taxing
authorities
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above are nevertheless important to
understanding the consolidated financial statements. Those policies are
described in Note 1 to the consolidated financial statements contained herein.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002 and it is not expected to have a
significant impact on our financial position and results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosures," an amendment to SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The transition guidance
and annual disclosure provisions are effective for the year ended
25
December 31, 2002, and the interim disclosure requirements are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others," which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 requires the recognition 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 it 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 45 to have a
significant impact on our financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation 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's floating rate debt
under its credit facility exposes the Company to 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 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, interest expense would increase or decrease by $0.2 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
for the interest rate swap discussed above, CBIZ does not purchase instruments,
hedges, or "other than trading" instruments that are likely to expose 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 that 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 funds 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
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
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Proposal No. 1 -- Election of
Directors" in CBIZ's definitive proxy statement relating to the 2003 Annual
Stockholders Meeting is incorporated herein by reference.
On October 10, 2002, CBIZ announced that Chairman Michael G. DeGroote had
resigned from the Company's Board of Directors approvedfor health reasons, and that
current Chief Executive Officer and Director Steven L. Gerard was elected as
Chairman of the adoptionBoard. In addition, to fill the vacancy created by Mr.
DeGroote's resignation, the Board of a proposed amendmentDirectors appointed Mr. DeGroote's son, Mr.
Gary W. DeGroote, to the Company's Certificate of
Incorporation to change its name from International Alliance Services, Inc. to
Century Business Services, Inc. On December 22, 1997, in accordance with
Delaware Law, the holders of a majority of the outstanding shares of the
Company's Common Stock executed a written consent approving the amendment.
12
13
DIRECTORS AND EXECUTIVE OFFICERS OF
CENTURY BUSINESS SERVICES, INC.Board.
The following table sets forth certain information as of December 31, 1997 regarding the directors,
executive officers and certain key employees of the
Company.CBIZ. Each executive officer of
the CompanyCBIZ 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
the CompanyCBIZ and any other person pursuant to which he or she was selected as an
officer.
NAME AGE POSITION(S)
- --------------------------------- ---- ----------------------------------------------------- -----------
EXECUTIVE OFFICERS AND DIRECTORS:
Michael G. DeGroote(3) 64Steven L. Gerard (1)...................... 57 Chairman and Chief Executive Officer
Jerome P. Grisko, Jr. (1)................. 41 President and Chairman of
the Board
Gregory J. Skoda(3) 41 ExecutiveChief Operating Officer
Ware H. Grove (1)......................... 52 Senior Vice President and Director
Charles D. Hamm, Jr.(3) 43 Chief Financial
Officer
and Treasurer
Edward F. Feighan 50Douglas R. Gowland........................ 61 Senior Vice President
Public Affairs
Douglas R. Gowland 56Leonard Miller............................ 63 Senior Vice President, Business Integration
Keith W. Reeves 40Accounting, Tax &
Advisory
Robert A. O'Byrne......................... 46 Senior Vice President, Business Services
Craig L. Stout 49 Senior Vice President,Benefits &
Insurance
ServicesMichael W. Gleespen....................... 44 Secretary and General Counsel
Rick L. Burdick(1) 46Burdick (1)(2)(3)................. 51 Director and Vice Chairman
Gary W. DeGroote.......................... 47 Director
Joseph S. DiMartino 54(3)................... 59 Director
Harve A. Ferrill(1)Ferrill (2) 65 Director
Hugh P. Lowenstein(2) 67(3)................... 70 Director
Richard C. Rochon(1)Rochon (2) 40(4).................. 45 Director
OTHER KEY EMPLOYEES:
Thomas J. Bregar 41George A. Dufour.......................... 57 Chief Technology Officer
Mark M. Waxman............................ 46 Senior Vice President Information Technology Systems
Daniel J. Clark 43 Vice President, Corporate Relations
Ralph M. Daniel, Jr 41 Vice President, Payroll Administration Services
Roswell P. Ellis 63 Vice President, Specialty Insurance Services
Charles J. Farro 47 Vice President, Employee Benefits Design and
Administration Services
Kenneth M. Millisor 60 Vice President, Workers' Compensation Services
Steven M. Nobil 50of Marketing
Teresa E. Bruce........................... 38 Vice President, Human Resources
Services
Patrick J. SimersChris Spurio.............................. 37 Vice President, Valuation Services
C. Robert Wissler 51 Vice President, Comprehensive Business Services
Andrew B. Zelenkofske 37 Vice President, Accounting Systems, Advisory and
Tax Services
Barbara A. Rutigliano 46 Corporate SecretaryFinance
Kelly J. Kuna............................. 33 Controller
- ---------------
(1) Member of AuditManagement Executive Committee
(2) Member of CompensationAudit Committee
(3) Member of Management ExecutiveNominating & Governance Committee
(4) Member of Compensation Committee
EXECUTIVE OFFICERS AND DIRECTORS:
MICHAEL G. DEGROOTESteven L. Gerard was elected by the Board to serve as its Chairman in
October, 2002. He was appointed Chief Executive Officer and Director in October,
2000. Mr. Gerard was Chairman and CEO of Great Point Capital, Inc., a provider
of operational and advisory services from 1997 to October 2000. From 1991 to
1997, he was Chairman and CEO of Triangle Wire & Cable, Inc. and its successor
Ocean View Capital, Inc. Mr. Gerard's
27
prior experience includes 16 years with Citibank, N.A. in various senior
corporate finance and banking positions, including ultimately Senior Managing
Director, responsible for the risk management of Citibank's commercial and
investment banking activities in the United States, Europe, Australia and Japan.
Further, Mr. Gerard served seven years with the American Stock Exchange, where
he last served as Vice President of the Securities Division. Mr. Gerard also
serves on the Boards of Directors of Fairchild Company, Inc., Lennar
Corporation, TIMCO Aviation Services, Inc. and Joy Global, Inc.
Rick L. Burdick has served as a Director of CBIZ since October 1997, when
he was elected as an outside director. In October 2002, he was elected by the
Board as Vice Chairman, a non-officer position. Mr. Burdick has been a partner
at the law firm of Akin Gump Strauss Hauer & Feld L.P since April 1988. Mr.
Burdick serves on the Board of Directors of AutoNation, Inc.
Gary W. DeGroote has served as a Director of CBIZ since October, 2002, when
he was elected as an 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 Resources
Inc.
Joseph S. DiMartino has served as a Director of CBIZ since November 1997,
when he was elected as an outside director. Mr. DiMartino has been Chairman of
the Board of the CompanyDreyfus Family of Funds since April 1995January 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, The Newark Group, and the Muscular Dystrophy
Association.
Harve A. Ferrill has served as a Director of CBIZ since October 1996, when
he was elected as an outside 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 November
1997.1982.
Richard C. Rochon has served as a Director of CBIZ since October 1996, when
he was elected as an outside director. Mr. DeGrooteRochon is Chairman and Chief
Executive Officer of Royal Palm Capital Partners, a private investment and
management fund. From 1985 to February 2002, Mr. Rochon served in various
capacities with, and most recently as, President of Huizenga Holdings, Inc., a
management and holding company owned by H. Wayne Huizenga. Mr. Rochon also
served, as a director since September 1996 and as Vice Chairman since April
1997, of Boca Resorts, Inc., the owner and operator of luxury resort properties
in South Florida. From 1979 until 1985, Mr. Rochon was employed as a certified
public accountant by the public accounting firm of Coopers & Lybrand, L.L.P. Mr.
Rochon also serves on the Board of Directors of Citizens Bancshares of South
Florida.
Jerome P. Grisko, Jr. has served as President and Chief ExecutiveOperating Officer
of the
Company from April 1995 until October 1996.CBIZ since February 1, 2000. Mr. DeGroote servedGrisko joined CBIZ as Chairman of
the Board, President and Chief Executive Officer of Republic Industries, Inc.
("RII") from May 1991 to August 1995. Mr. DeGroote founded Laidlaw Inc., a
Canadian waste services and transportation company in 1959. In 1988, Mr.
DeGroote sold his controlling interest in Laidlaw to Canadian Pacific Limited.
Mr. DeGroote served as President and Chief Executive Officer of Laidlaw from
1959 until 1990. Mr. DeGroote also serves as a director of RII.
13
14
GREGORY J. SKODA has served as the Executive Vice President,
Mergers & Acquisitions in September 1998 and a Directorwas promoted to Senior Vice
President, Mergers & Acquisitions and Legal Affairs in December of the Company since November 1997, the Chief Financial Officer and Treasurer of
the Company from November 1996 until November 1997, and as a director and an
officer of a number of the Company's subsidiaries.1998. Prior
to the Company's
acquisition of SMR & Co. Business Services ("SMR") in December 1996,joining CBIZ, Mr. Skoda
served as President and Chairman of SMR, which he founded in 1980. Mr. Skoda is
a CPA and an active member of the American Institute of Certified Public
Accountants in the Tax, Employee Benefits, and Management Advisory Services
divisions.
CHARLES D. HAMM, JR. has served as Chief Financial Officer and Treasurer
since November 1997. Mr. HammGrisko was associated with KPMG Peat Marwickthe law firm of Baker &
Hostetler LLP, where he practiced from June 1984September 1987 until November 1997,September 1998,
serving as a partner of such firm from July 1996
until November 1997.January 1995 to September 1998. While at
Baker & Hostetler, Mr. Hamm is a CPAGrisko concentrated his practice in the area of mergers,
acquisitions and a member of the American Institute of
Certified Public Accountants and the Ohio Society of Certified Public
Accountants.
EDWARD F. FEIGHANdivestitures.
Ware H. Grove has served as Senior Vice President Public Affairsand Chief Financial
Officer of the CompanyCBIZ since November 1997.December 2000. Before joining CBIZ, Mr. Feighan served as Chief Executive Officer,
President and a Director of the Company from October 1996 through November 1997.
Mr. Feighan also serves as a director and an officer of a number of the
Company's subsidiaries. From 1983 until 1993, Mr. Feighan served as the
representative from the Ohio 19th Congressional District of the United States
House of Representatives. During his tenure in Congress, Congressman Feighan
served on the Judiciary and the House Foreign Affairs Committee; Chairman,
International Narcotics Control Committee; President, The Interparliamentary
Union; and permanent Representative to the Helsinki Commission. He currently
serves on the board of trustees of the National Democratic Institute for
International Affairs, and the Rock and Roll Hall of Fame and Museum.
DOUGLAS R. GOWLAND hasGrove served as
Senior Vice President Business
Integrationand Chief Financial Officer of Bridgestreet
Accommodations, Inc., which he joined in early 2000 to restructure financing,
develop strategic operating alternatives, and assist with merger negotiations.
Prior to joining Bridgestreet, Mr. Grove served for
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 Computerland/Vanstar, Manville Corporation, The Upjohn Company, and
First of America Bank.
Douglas R. Gowland has served as a Senior Vice President since November
1997. Mr. Gowland served as a Director of the CompanyCBIZ from April 1995 through November
1997. From April 1995 until October 1996, Mr. Gowland served as the Company'sCBIZ's Executive
Vice President and Chief Operating Officer. From January 1992 to April 1995, Mr.
Gowland served as Vice President -- Hazardous Waste Operations of RII.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.
KEITH W. REEVESLeonard Miller has served as CBIZ Accounting, Tax and Advisory Services
Practice Head since November 2000 and was appointed Senior Vice President in
February 2002. Mr. Miller was the President and Director of Financial Operations
for Miller Wagner & Company, Ltd. in Phoenix, Arizona for 22 years before the
firm joined the Century Business Services since March 1997family and became Miller Wagner
Business Services, Inc. and Miller Wagner & Company, PLLC. Mr. Miller was the
Regional Managing Partner for Lester Witte and Company, and was responsible for
11 of its offices prior to co-founding Miller Wagner & Company, Ltd. With over
38 years of experience, Mr. Miller is a recognized expert in the fields of
finance, real estate, general business consulting and various litigation support
matters. Professional affiliations include the American Institute of Certified
Public Accountants (AICPA), the Arizona Society of Certified Public Accountants
(ASCPA) and the Illinois Society of Certified Public Accountants (ISCPA).
Robert A. O'Byrne has served as a directorSenior Vice President of CBIZ since
December 1998 and is responsible for CBIZ's Benefits Administration & Insurance
Services Group. Mr. O'Byrne served as President and Chief Executive Officer of
employee benefits brokerage/consulting firms Robert D. O'Byrne and Associates,
Inc. and The Grant Nelson Group, Inc. prior to their acquisition by CBIZ in
December 1997. Mr. O'Byrne has more than 24 years of experience in the insurance
and benefits consulting field.
Michael W. Gleespen has served as Corporate Secretary and General Counsel
since June 2001 and General Counsel since June 2001. Mr. Gleespen is an officerattorney
and has served as CBIZ's Vice President of a numberRegulatory 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
Company's
subsidiaries.Public Pension Plan Working Group. Mr. ReevesGleespen 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:
George A. Dufour was appointed 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 Healthcare Information Management Systems Society.
Mark M. Waxman has alsoover twenty years experience in marketing and branding.
Prior to joining CBIZ, he was CEO/Creative Director of one of Silicon Valley's
most well-known advertising agencies, Carter Waxman.
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. 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 PresidentChairman of
SMR since December
1996. Mr. Reevesthe Board of the Silicon Valley Chamber of Commerce.
Teresa E. Bruce has served as Vice President of SMRHuman Resources since
January 1999. From 1995 to 1999 Ms. Bruce served as Director of Human Resources
for Robert D. O'Byrne & Associates, Inc. and The Grant Nelson Group, Inc.,
subsidiaries of CBIZ now known as CBIZ Benefits and Insurance Services, Inc. Ms.
Bruce has over 15 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.
Chris Spurio has served as Vice President of Finance since July 1999.
Previously, Mr. Spurio was Controller since January 1998. Mr. Spurio also served
as Acting Chief Financial Officer from August 1984 until its
acquisition by the Company inMay 2000 to December 1996.2000. Mr. ReevesSpurio 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.
CRAIG L. STOUTKelly J. Kuna has served as Senior Vice President, Insurance ServicesCorporate Controller since November 1997. Mr. StoutJuly 1999. Mrs. Kuna
served as Chief Operating Officer and a DirectorManager of the CompanyExternal Reporting from October 1996 through November 1997. Mr. Stout also serves as
a director and an officer of a number of the Company's subsidiaries.December 1998 to June 1999. Prior
to joining the Company, Mr. Stout served as Executive Vice President of Alliance
Holding Corporation whichCBIZ, Mrs. Kuna was the holding corporation of the CSC Group and CSA
and two other companies which he founded, Contract Operations Planning, Inc., a
surety claims managementassociated with KPMG LLP, an international
accounting firm, and Contract Surety Reinsurance Corporation, a
reinsurance intermediary for facultative surety reinsurance.
RICK L. BURDICK has served as a Director of the Company since November
1997. Mr. Burdick has been a partner at the law firm of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. since April 1988. Mr. Burdick serves on the Boards of
Directors of RII and J. Ray McDermott, S.A.
JOSEPH S. DIMARTINO has served as a Director of the Company since November
1997. Mr. DiMartino has been Chairman of the Board of Dreyfus Group of Mutual
Funds since January 1995. Mr. DiMartino served as President, Chief Operating
Officer and Director of The Dreyfus Corporation from October 1982 until December
1994. Mr. DiMartino also serves on the Board of Directors of Noel Group, Inc.,
Staffing Resources, Inc., Health Plan Services Corporation, Carlyle Industries,
Inc., and the Muscular Dystrophy Association.
HARVE A. FERRILL has served as a Director of the Company since October
1996. Mr. Ferrill has served as Chief Executive Officer of Advance Ross
Corporation, a company that provides tax refunding services ("ARC"), since 1991
and as President of Ferrill-Plauche Co., Inc., a private investment company,
since 1982. Mr. Ferrill
14
15
served as President of ARC from 1990 to 1993 and as Chairman of the Board from 1992 to 1996. Mr. Ferrill has served as Chairman of the Board of GeoWaste
Incorporated since 1991 and also serves on the Boards of Directors of Gaylord
Container Corporation and Quill Corporation.
HUGH P. LOWENSTEIN has servedDecember 1998, serving as a DirectorSenior Manager of the Company since March
1997. Mr. Lowenstein has served as the Foundersuch
firm from July 1998 to December 1998. Mrs. Kuna is a CPA and Chief Executive Officer of
Shore Capital Ltd. (Bermuda), a consulting and investment advisory firm, since
1994. Mr. Lowenstein served as a Managing Director of Donaldson, Lufkin and
Jenrette Securities Corporation from 1987 to 1994. Mr. Lowenstein also serves on
the Board of Directors of Terra Nova (Bermuda) Holdings Ltd.
RICHARD C. ROCHON has served as a Director of the Company since October
1996. Mr. Rochon has served since 1988 as President of Huizenga Holdings, Inc.,
a management and holding company for diversified investments in operating
companies, joint ventures, and real estate, on behalf of its owner, Mr. H. Wayne
Huizenga. Mr. Rochon also has served as a director since September 1996 and as
Vice Chairman of Florida Panthers Holdings, Inc., a leisure and recreation and
sports and entertainment company, since April 1997. From 1985 until 1988, Mr.
Rochon served as Treasurer of Huizenga Holdings, Inc. and from 1979 until 1985,
he was employed as a certified public accountant by the international public
accounting firm of Coopers & Lybrand, L.L.P.
OTHER KEY EMPLOYEES:
THOMAS J. BREGAR was named Vice President, Information Technology Systems
in November 1997. Mr. Bregar joined SMR in December 1996 to develop its
Information Technology Consulting Practice. Prior to joining SMR, Mr. Bregar was
with Price Waterhouse's Management Consulting Services Practice from 1986
through 1992, and again as Director from 1994 to 1996. In 1993, he served as
Vice President in the Information Management Services Division at Society
National Bank (now Keycorp Services).
DANIEL J. CLARK was named Vice President, Corporate Relations in November
1997 and is the Senior Vice President of Evergreen National Indemnity Company
("Evergreen") and a director of Century Surety Company, both subsidiaries of the
Company. Prior to joining Evergreen, Mr. Clark served as Chief of Staff for then
Congressman Edward F. Feighan from 1983 through 1993. Mr. Clark is a member of the
American Institute of Certified Public Accountants and the Ohio Bar Association and serves as a Board MemberSociety 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" in CBIZ's definitive proxy
statement for the Port of Cleveland.
RALPH M. DANIEL, JR. was named as Vice President, Payroll Administration
Services in November 1997. Prior to joining Century, Mr. Daniel served as
Chairman and Chief Executive Officer of BMS, Inc. (Business Management
Services), which he co-founded, from 1988 through its acquisition by the Company
in August 1997. Mr. Daniel is a CPA and serves on the Board of the Independent
Payroll and Employer Services Association.
ROSWELL P. ELLIS was named Vice President, Specialty Insurance Services in
November 1997. Mr. Ellis served as the Company's Senior Vice
President -- Insurance Group from March 1997 to November 1997. He continues to
serve as Chairman and Chief Executive Officer of Century Surety Company, a
position he has held since 1987, and he is also Chairman of Continental Heritage
Insurance Company and Vice Chairman and CEO of Evergreen, all subsidiaries of
the Company. Mr. Ellis has been in the insurance business for over 35 years and
holds four professional designations: Chartered Property and Casualty
Underwriter, Chartered Life Underwriter, Associate in Claims and Associate in
Surplus Lines.
CHARLES J. FARRO was named Vice President, Employee Benefits Design and
Administration Services in November 1997. Mr. Farro also serves as Chairman and
Chief Executive Officer of The Benefits Group, a subsidiary of the Company. Mr.
Farro serves on the Boards of Directors of the March of Dimes and the Akron Art
Museum.
KENNETH R. MILLISOR was named Vice President, Workers' Compensation
Services in November 1997. He is the Chairman and Chief Executive Officer of M&N
Risk Management, Inc. and the President and Chief Executive Officer of Millisor
& Nobil Co., L.P.A., subsidiaries of the Company. Mr. Millisor was admitted to
the Bar in 1961 and is an active member of the Akron, Ohio State and American
Bar Associations.
15
16
STEVEN M. NOBIL was named Vice President, Human Resources Services in
November 1997. Mr. Nobil serves as President of M&N Risk Management, Inc., a
subsidiary of the Company. Mr. Nobil serves on several Boards including the
Diabetes Association of Greater Cleveland, Baldwin Wallace College, Cuyahoga
Community College, Big Brothers and Big Sisters, American Red Cross and Grand
Prix Charities.
PATRICK J. SIMERS was named Vice President, Valuation Services in November
1997. Mr. Simers serves as President of Valuation Counselors Group, Inc., a
subsidiary of the Company. Mr. Simers is a Certified Real Estate Appraiser in 12
states and maintains memberships in the American Society of Appraisers and the
Appraisal Institute.
C. ROBERT WISSLER was named Vice President, Comprehensive Business Services
in November 1997. Mr. Wissler serves as President and Chief Executive Officer of
Comprehensive Business Services, Inc., a subsidiary of the Company. He was
Senior Vice President and Chief Financial Officer of Sir Speedy, Inc. from 1978
through 1990. Prior to that time, Mr. Wissler was an auditor with Arthur Young &
Co. from 1972 to 1974, and he was a baseball player with the St. Louis Cardinals
from 1969 through 1972. Mr. Wissler is a Director of International Franchise
Association.
ANDREW B. ZELENKOFSKE was named Vice President, Accounting Systems,
Advisory and Tax Services in November 1997. Mr. Zelenkofske serves as President
of ZA Business Services, Inc., a subsidiary of the Company. Prior to joining
Century, Mr. Zelenkofske served for several years as President and Managing
Director of Zelenkofske Axelrod and Co., Ltd. Mr. Zelenkofske is a CPA and has
been appointed to the Pennsylvania State Board of Accountancy.
BARBARA A. RUTIGLIANO was named Corporate Secretary in December 1997. Ms.
Rutigliano was Senior Counsel and Corporate Secretary of BP America Inc. from
1989 until 1997 and was associated with the law firm of Squire, Sanders &
Dempsey from 1983 to 1989. Ms. Rutigliano is a member of the Ohio Bar, the
American Bar Association and the American Society of Corporate Secretaries.
16
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is quoted on The Nasdaq National Market
under the trading symbol "CBIZ". Prior to December 23, 1997, the Common Stock
was quoted under the trading symbol "IASI". The table below sets forth the range
of high and low sales prices for the Common Stock as reported on The Nasdaq
National Market for the periods indicated. Prior to April 27, 1995, the day on
which the Common Stock of the Company was first publicly traded, there was no
public market for the Common Stock of the Company. The following prices are
adjusted for the Company's July 1996 two for one stock split.
PRICE RANGE
OF COMMON STOCK
----------------
HIGH LOW
------ -----
1995
Second Quarter (beginning April 27, 1995)................ $ 2.25 $1.25
Third Quarter............................................ 4.00 1.81
Fourth Quarter........................................... 2.31 1.56
1996
First Quarter............................................ $ 1.59 $1.25
Second Quarter........................................... 20.88 1.44
Third Quarter............................................ 18.75 4.75
Fourth Quarter........................................... 12.75 7.50
1997
First Quarter............................................ $15.13 $9.88
Second Quarter........................................... 11.50 7.88
Third Quarter............................................ 11.75 7.88
Fourth Quarter........................................... 17.25 8.75
On December 31, 1997, the last reported sale price of the Company's Common
Stock as reported on The Nasdaq National Market was $17.25 per share. As of
February 13, 1998, the Company had 6,385 holders of record of its Common Stock.
DIVIDEND POLICY
The Company's credit facility contains restrictions on the Company's
ability to pay dividends. Since April 27, 1995, the Company has not declared or
paid any cash dividends on its capital stock. The Company intends to retain its
earnings, if any, for use in its business and does not anticipate paying any
cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for Century
and are derived from the historical consolidated and combined financial
statements and notes thereto, which are included elsewhere in this2003 Annual Report
of Century. The information set forth below should be read in conjunction with
"Management's
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Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated and combined financial statements of Century and the notes
thereto, which are included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues:
Business services fees and commissions:............ $ 63,411 $ 1,606 $ -- $ -- $ --
Specialty insurance services (regulated):
Premiums earned.................................. 37,238 27,651 26,962 23,368 17,373
Net investment income............................ 4,524 3,564 3,341 2,477 1,377
Net realized gains (losses) on investments....... 3,044 1,529 166 80 (91)
Other income..................................... 13 1,419 470 1,385 1,737
--------- --------- -------- -------- --------
Total revenues................................... $108,230 $ 35,769 $30,939 $27,310 $20,396
Expenses:
Operating expenses -- business services............ 50,277 1,107 -- -- --
Loss and loss adjustment expenses.................. 20,682 17,624 15,117 12,494 8,613
Policy acquisition expenses........................ 9,670 7,699 7,774 5,428 4,996
Corporate general and administrative expenses...... 4,578 302 -- -- --
Depreciation and amortization expenses............. 2,612 320 -- -- --
Other expenses..................................... 2,331 2,655 3,157 4,544 3,302
--------- --------- -------- -------- --------
Total expenses................................... 90,150 29,707 26,048 22,466 16,911
Income from continuing operations before net
corporate interest income and income tax expense... 18,080 6,062 4,891 4,844 3,485
Net corporate interest income........................ 965 -- -- -- --
--------- --------- -------- -------- --------
Income from continuing operations before income tax
expense............................................ 19,045 6,062 4,891 4,844 3,485
Income tax expense................................... 6,280 1,640 1,422 1,344 1,189
--------- --------- -------- -------- --------
Income from continuing operations.................... 12,765 4,422 3,469 3,500 2,296
Loss from operations of discontinued business........ 663 38 -- -- --
Loss on disposal of discontinued business............ 572 -- -- -- --
--------- --------- -------- -------- --------
Net income........................................... $ 11,530 $ 4,384 $ 3,469 $ 3,500 2,296
========= ========= ======== ======== ========
Weighted average common shares....................... 36,940 17,863 14,760 14,760 14,760
Weighted average common shares and dilutive potential
common shares...................................... 48,904 24,032 16,956 16,956 16,956
Basic earnings per share:
From continuing operations......................... $ 0.35 $ 0.25 $ 0.24 $ 0.24 $ 0.16
From discontinued operations....................... $ (0.04) $ -- $ -- $ -- $ --
Diluted earnings per share:
From continuing operations......................... $ 0.26 $ 0.18 $ 0.20 $ 0.21 $ 0.14
From discontinued operations....................... $ (0.02) $ -- $ -- $ -- $ --
Gross written premiums............................... $ 59,751 $ 42,888 $37,695 $37,869 $29,992
Net written premiums................................. $ 37,488 $ 31,149 $26,677 $27,219 $21,173
Loss ratio........................................... 34.3% 41.3% 39.2% 37.9% 38.0%
LAE ratio............................................ 21.2% 22.5% 16.9% 15.6% 11.6%
Expense ratio........................................ 32.2% 38.0% 39.9% 43.5% 39.7%
--------- --------- -------- -------- --------
Combined ratio....................................... 87.7% 101.8% 96.0% 97.0% 89.3%
========= ========= ======== ======== ========
Invested assets and cash............................. $100,868 $108,523 $60,908 $57,642 $46,670
Goodwill, net of accumulated amortization............ 89,856 6,048 -- -- --
Total assets......................................... 287,567 167,330 86,735 81,931 68,117
Loss and loss expenses payable....................... 50,655 41,099 37,002 34,661 29,528
Total liabilities.................................... 139,657 76,008 59,967 58,100 50,304
Total shareholders' equity........................... 147,910 91,322 26,768 23,580 18,401
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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 the
Company's financial position and results of operations for each of the years
ended December 31, 1997, 1996 and 1995. This discussion should be read in
conjunction with the Company's consolidated and combined financial statements
and notes thereto included herein. During fiscal 1997, the Company continued its
strategic acquisition program, purchasing the businesses of 39 complementary
companies. With one immaterial exception, each of the acquisitions was accounted
for as a purchase, and accordingly, the operating results of the acquired
companies have been included in Century's consolidated and combined financial
statements since their date of acquisition. The results of operations related to
the Company's environmental services operations have been reflected as a
discontinued operation in the consolidated and combined financial statements.
See "Results of Operations -- Discontinued Operations."
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
REVENUES
Total revenues increased to $108.2 million for the year ended December 31,
1997 from $35.8 million in 1996, representing an increase of $72.4 million, or
203%. The increase was primarily attributable to the Company's acquisition
activity in outsourced business services.
Business service fees and commissions increased to $63.4 million for the
year ended December 31, 1997 from $1.6 million in 1996, representing an increase
of $61.8 million. The increase was primarily attributable to the acquisitions
completed in 1997. Due to the majority of recent acquisitions having been
accounted for under the purchase method, the Company's consolidated financial
statements give effect to such acquisitions only from their respective
acquisition dates.
Premiums earned increased to $37.2 million for the year ended December 31,
1997 from $27.7 million in 1996, representing an increase of $9.5 million, or
34.7%. Gross written premiums increased to $59.8 million for the year ended
December 31, 1997 from $42.9 million in 1996, representing an increase of $16.9
million, or 39.3%. Net written premiums increased to $37.5 million for the year
ended December 31, 1997 compared to $31.1 million in 1996, representing an
increase of $6.4 million, or 20.4%. These increases were primarily attributable
to the growth in commercial liability premiums over 1996 levels, the
introduction of workers compensation coverage emanating from an August 1997
business transaction and the assumption of contract surety premiums under a
certain reinsurance agreement entered into in 1997.
Net investment income increased to $4.5 million for the year ended December
31, 1997 from $3.6 million in 1996, representing an increase of $960,000, or
26.9%. This increase was attributable to an increase in the annualized return on
investments to approximately 5.7% for the year ended December 31, 1997 from 5.3%
in 1996 and to an increase in the average investments outstanding to $74.2
million for the year ended December 31, 1997 from $64 million in 1996.
Net realized gain on investments increased to $3.0 million for the year
ended December 31, 1997 from $1.5 million in 1996. This increase was primarily
due to increased sales of equity securities.
Other income decreased to $13,000 for the year ended December 31, 1997 from
$1.4 million for the comparable period in 1996, representing a decrease of $1.4
million. The decrease was primarily attributable to non-recurring income from
the American Sentinel settlement.
EXPENSES
Total expenses increased to $90.2 million for the year ended December 31,
1997 from $29.7 million in 1996, representing an increase of $60.5 million. Such
increase was primarily attributable to the increase in operating expenses, which
reflects the impact of the Company's acquisitions made in 1997 and the
corresponding increase
19
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of corporate staff and related integration costs. As a percentage of revenues,
total expenses increased to 83.3% for the year ended December 31, 1997 from
83.1% in 1996.
Operating expenses for the business services operations increased to $50.3
million for the year ended December 31, 1997 from $1.1 million in 1996,
representing an increase of $49.2 million. Such increase was attributable to
business services acquisitions completed in 1997. As a percentage of fees and
commissions, operating expenses increased to 79.3% for the year ended December
31, 1997 from 68.9% in 1996.
Loss and loss adjustment expenses increased to $20.7 million for the year
ended December 31, 1997 from $17.6 million in 1996, representing an increase of
$3.1 million, or 17.4%. Such increase was attributable to the increased premium
volume for liability coverages. As a percentage of premiums earned, loss and
loss adjustment expenses decreased to 55.5% for the year ended December 31, 1997
from 63.7% in 1996. Such decrease was the result of claims from prior years that
were settled and paid in 1996 for higher than reserved amounts.
Policy acquisition expenses increased to $9.7 million for the year ended
December 31, 1997 from $7.7 million in 1996, representing an increase of $2.0
million, or 25.6%. The increase corresponds directly to the increase in premium
volume. As a percentage of net written premiums, policy acquisition expenses
were 25.8% and 24.7% for the year ended December 31, 1997 and 1996,
respectively.
Corporate general and administrative expenses increased to $4.6 million for
the year ended December 31, 1997 from $302,000 in 1996. Such increase was
attributable to the creation of a corporate function in the fourth quarter of
1996 that did not exist prior to the reverse merger. Corporate general and
administrative expenses represented 4.2% of total revenues for the year ended
December 31, 1997.
Depreciation and amortization expense increased to $2.6 million for the
year ended December 31, 1997 from $320,000 in 1996, representing an increase of
$2.3 million. The increase is a result of the increase of goodwill amortization
resulting from the acquisitions completed by the Company in 1997. As a
percentage of total revenues, depreciation and amortization expense increased to
2.4% for the year ended December 31, 1997 from 0.8% in 1996. Such increase was
attributable to the implementation of the Company's acquisition strategy.
Other expenses decreased to $2.3 million for the year ended December 31,
1997 from $2.7 million in 1996, representing a decrease of approximately
$400,000. Such decrease was primarily attributable to the return of certain
ceding commissions, which are calculated based on historical experience in
relation to certain reinsurance contracts. The inclusion of the return of ceding
commissions as an other expense item conforms to insurance industry standards.
As a percentage of net written premiums, other expenses decreased to 6.2% for
the year ended December 31, 1997 from 8.5% in 1996. Such decrease reflects the
positive impact of the ceding commissions.
NET CORPORATE INTEREST INCOME
Net Corporate interest income increased to $965,000 for the year ended
December 31, 1997 from zero in 1996. Such increase was attributable to the
increase in cash and cash equivalent balances for the Company, excluding
specialty insurance and outsourced business services.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Total revenues increased $4.9 million, or 16%, from $30.9 million in 1995
to $35.8 million in 1996. Premiums earned increased approximately $700,000 on an
increase of $4.5 million in net written premiums in 1996. Much of the increase
in net written premiums was recorded in the second half of 1996, which directly
impacted Century's earned premium. On a gross written basis, Century reported an
increase of $5.2 million in 1996, $5.0 million of which was generated through
brokerages and $800,000 of which was generated through general agencies. These
increases were offset by a $1.3 million decline in Century's remedial action
coverages.
Century reported increases in net investment income of $223,000 and net
realized gains on investments of $1.4 million in 1996. Net investment income
grew 6.7% on invested assets of $68.6 million in 1996. Century's $1.4 million
increase in net realized gains on investments from $166,000 in 1995 to $1.5
million in 1996 is attributable to the gains realized on the sale of certain
equity investments.
20
21
Other income increased $949,000 in 1996 over 1995 and is attributable to
non-recurring income of $1.1 million from the American Sentinel settlement,
higher commission income of $400,000 and SMR revenues of $600,000 since its
acquisition.
Total expenses increased $3.7 million to $29.7 million in 1996 from $26.0
million in 1995. Such increase was primarily attributable to an increase in loss
and loss adjustment expenses ("LAE") of $2.5 million, and an increase in
operating expenses of $1.1 million, which reflects the impact of the Company's
acquisitions made in 1996. While losses incurred have increased $844,000, loss
development from prior years increased $1.4 million and primarily relate to
property losses, which were higher than normal. In addition, Century has
experienced increases in LAE to $6.2 million in 1996 from $4.5 million in 1995.
Such increases are attributable to Century's business mix, primarily its
casualty lines of business, and to the general litigation climate. The casualty
lines of business generally have higher loss adjustment costs relative to
premium dollars. Another factor affecting this increase is the court ruling in
the case of Montrose Chemical Corporation v. Admiral Insurance Company. The
California Supreme Court adopted a "continuous trigger of coverage" in cases
involving continuous and progressive third party damage claims. Insurance
companies are liable for claims occurring prior to the policy period for claims
which continued to progress during the course of the policy term. The exposure
to Century does not have a residual impact on loss reserves but does have a
direct effect on the Company's loss adjustment reserving practices due to a
higher potential for claims handling and litigation costs.
Income from continuing operations before taxes increased $1.2 million, or
23.9%, to $6.1 million in 1996 from $4.9 million in 1995 and net income
increased $915,000, to $4.4 million in 1996 from $3.5 million in 1995 primarily
for the reasons stated above.
COMBINED AND OPERATING RATIOS
The combined ratio is the sum of the loss ratio and expense ratio and is
the traditional measure of underwriting performance for insurance companies. The
operating ratio is the combined ratio less the net investment income ratio (net
investment income to net earned premium) excluding realized and unrealized
capital gains and is used to measure overall company performance.
The following table reflects the loss, LAE, expense, combined, net
investment and operation ratios of Century on a generally accepted accounting
principles ("GAAP") basis for each of the years ended December 31, 1997, 1996
and 1995:
YEAR ENDED DECEMBER
31,
---------------------
1997 1996 1995
---- ----- ----
Loss ratio............................................... 34.3 41.3 39.2
LAE ratio................................................ 21.2 22.5 16.9
Expense ratio............................................ 32.2 38.0 39.9
Combined ratio........................................... 87.7 101.8 96.0
Net investment ratio..................................... 12.2 12.9 12.4
Operating ratio.......................................... 75.5 88.9 83.6
Expenses
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net earned premiums on a GAAP basis. Expense ratios have been
favorably impacted by reinsurance contingencies.
Liability for Losses and Loss Expenses Payable
As of December 31, 1997, the liability for losses and LAE constituted 36.3%
of Century's consolidated liabilities. Century has established reserves that
reflect its estimates of the total losses and LAE it will ultimately be required
to pay under insurance and reinsurance policies. Such reserves include losses
that have been reported but not settled and losses that have been incurred but
not reported ("IBNR"). Loss reserves are established on an undiscounted basis
after reductions for deductibles and estimates of salvage subrogation.
21
22
For reported losses, Century establishes reserves on a "case" basis within
the parameters of coverage provided in the related policy. For IBNR losses,
Century estimates reserves using established actuarial methods. Case and IBNR
loss reserve estimates reflect such variables as past loss experience, social
trends in damage awards, changes in judicial interpretation of legal liability
and policy coverages, and inflation. Century takes into account not only
monetary increases in the cost of what is insured, but also changes in societal
factors that influence jury verdicts and case law and, in turn, claim costs.
Century's loss reserves have been certified in accordance with the requirements
of the National Association of Insurance Commissioners.
The consolidated and combined financial statements of Century include the
estimated liability for unpaid losses and LAE of Century's insurance operations.
Reserves for unpaid losses covered by insurance policies and bonds consist of
reported losses and IBNR losses. These reserves are determined by claims
personnel and the use of actuarial and statistical procedures and they represent
undiscounted estimates of the ultimate cost of all unpaid losses and LAE through
year end. Although management uses many resources to calculate reserves, a
degree of uncertainty is inherent in all such estimates. Therefore, no precise
method for determining ultimate losses and LAE exist. These estimates are
subject to the effect of future claims settlement trends and are continually
reviewed and adjusted (if necessary) as experience develops and new information
becomes known. Any such adjustments are reflected in current operations. See
Footnote 6 to the Consolidated and Combined Financial Statements contained
herein for the activity in the liability for unpaid losses and loss expenses for
the years ended December 31, 1997, 1996, and 1995.
ANALYSIS OF LOSS AND LAE DEVELOPMENT
The historical pattern of redundancy might not be indicative of experience
which may emerge in the future.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Net liability for
losses and loss
expenses........... $3,484 $7,202 $8,168 $10,428 $12,775 $14,107 $21,023 $25,278 $28,088 $32,985 $42,399
Cumulative amount of
net liability paid
through:
One year later... 1,566 2,985 2,404 2,404 2,811 3,026 4,131 6,309 8,785 8,773 --
Two years
later......... 2,172 3,876 3,433 4,090 4,894 3,848 7,503 11,161 14,478
Three years
later......... 2,623 4,398 4,322 5,239 5,372 4,786 9,346 13,936
Four years
later......... 2,759 4,799 4,984 5,184 6,010 5,119 10,620
Five years
later......... 2,907 5,140 4,880 5,352 6,102 5,550
Six years
later......... 2,927 5,147 4,953 5,352 6,192
Seven years
later......... 2,935 5,152 4,947 5,366
Eight years
later......... 2,935 5,135 4,944
Nine years
later......... 2,917 5,128
Ten years
later......... 2,909
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YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(in thousands)
The retroactively
reestimated net
liability for loss
and loss expenses
as of:
One year later... 4,277 7,406 8,388 10,674 12,003 12,587 18,910 23,049 28,246 31,829 --
Two years
later......... 4,032 7,445 8,504 9,239 10,877 9,829 17,531 22,193 27,059
Three years
later......... 4,042 7,419 7,025 8,183 8,419 8,899 16,174 20,686
Four years
later......... 4,028 6,365 6,668 6,631 8,675 7,822 14,801
Five years
later......... 3,420 6,311 5,638 6,320 7,467 6,744
Six years
later......... 3,406 5,534 5,243 5,823 6,679
Seven years
later......... 3,009 5,308 5,133 5,532
Eight years
later......... 2,949 5,230 4,967
Nine years
later......... 2,926 5,138
Ten years
later......... 2,915
------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Net cumulative
redundancy......... $ 569 $2,064 $3,201 $ 4,896 $ 6,096 $ 7,363 $ 6,222 $ 4,592 $ 1,029 $ 1,156 $ --
======= ======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Gross
liability -- end of
year............... $34,661 $37,002 $41,099 $50,655
Reinsurance
recoverable........ 9,383 8,914 8,114 8,256
-------- -------- -------- --------
Net liability -- end
of year............ $25,278 $28,088 $32,985 $42,399
======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Century had cash and investments, excluding mortgage loans, of $99.0
million, $104.8 million, and $57.5 million at December 31, 1997, 1996 and 1995,
respectively. The $47.3 million increase from 1995 to 1996 is a result of
Century's generation of proceeds from stock issuances from exercises of
outstanding options and warrants and the Private Placement (defined herein),
profits and additional loss reserves on an increasing volume of liability
coverages which have slower payout patterns than property coverages.
Net cash provided by operating activities for the years ended December 31,
1997, 1996, and 1995 was $4.7 million, $13.2 million, and $3.6 million,
respectively. These amounts were adequate to meet the majority of Century's
capital expenditure, operating and acquisition costs and resulted primarily from
earnings and the timing of reinsurance contingency transactions.
Net cash provided by (used in) financing activities for the years ended
December 31, 1997, 1996, and 1995 was $15.6 million, $35.7 million, and $(5.6)
million, respectively. During 1996, Century realized approximately $38.2 million
in cash proceeds from a private placement and from stock issuances, offset in
part by dividends paid to Alliance Holding by CSC and CSU prior to the Merger
Transactions.
Sources of Cash
The Company's principal source of revenue from its business outsourcing
services operation is the collection of fees from professional services rendered
to its clients in the areas of information technology consulting, tax return
preparation and compliance, and business valuations, as well as other areas that
have been previously discussed.
Century's principal source of revenue from its specialty insurance services
operations consists of insurance and reinsurance premiums, investment income,
commission and fee income, and proceeds from sales and maturities of investment
securities. Premiums written become premiums earned for financial statement
purposes as the premium is earned incrementally over the term of each insurance
policy and after deducting the amount of premium ceded to reinsurers pursuant to
reinsurance treaties or agreements. The property and liability operation
23
24
of Century generates positive cash flow from operations as a result of premiums
being received in advance of the time when the claim payments are made.
The companies of the CSC Group are subject to regulation and supervision by
state insurance regulatory agencies, applicable generally to each insurance
company in its state of incorporation. Such regulations limit the amount of
dividends or distributions by an insurance company to its shareholders. If
insurance regulators determine that payment of a dividend or any other payment
to an affiliate (such as a payment under a tax allocation agreement) would,
because of the financial condition of the paying insurance company or otherwise,
be detrimental to such insurance company's policyholders or creditors, the
regulators may block payment of such dividend or such other payment to the
affiliates that would otherwise be permitted without prior approval.
Ohio law limits the payment of dividends to Century. The maximum dividend
that may be paid without prior approval of the Director of Insurance of the
State of Ohio is limited to the greater of the statutory net income of the
preceding calendar year or 10% of total statutory shareholder's equity as of the
prior December 31.
The Company has a $50 million revolving credit facility with Bank of
America, National Trust & Savings Association ("Bank of America"), as Agent. At
December 31, 1997, approximately $8 million was outstanding under such credit
facility. The interest rate under the credit facility is, at the Company's
option, either: (a) the higher of (i) 0.50% per annum above the latest Federal
Funds Rate or (ii) the rate of interest in effect from time to time announced by
the Bank of America, San Francisco, California office as its "reference rate,"
or (b) a floating rate based on certain offshore dollar interbank market rates.
The credit facility requires the Company to comply with various affirmative and
negative covenants, including (a) observance of various financial and other
covenants, (b) restrictions on additional indebtedness, (c) restrictions on
dividend payments and (d) restrictions on certain liens, mergers, dispositions
of assets and investments. The Company must also maintain a net worth equal to
the sum of (a) $88 million plus (b) 70% of subsequent net income plus (c) the
proceeds of any equity security offerings.
In December 1996, Century issued and sold 3,251,888 units of Century (the
"Units") for $9.00 per Unit (the "Private Placement"). Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common Stock
of Century at an exercise price of $11.00 per share exercisable, in whole or in
part, for a three year period from the date of issuance. The Private Placement
resulted in net proceeds of approximately $27.7 million, after deducting the
placement agent fee and other estimated expenses associated with the Private
Placement.
In addition, Westbury (Bermuda) Ltd. formerly known as MGD Holdings
("Westbury"); the Harve A. Ferrill Trust U/A 12/31/69 (the "Ferrill Trust"); and
WeeZor I Limited Partnership ("WeeZor"), affiliates of each of Messrs. Michael
G. DeGroote, Chairman of the Board of Century; Harve A. Ferrill and Richard C.
Rochon, directors of Century, respectively, purchased an aggregate of 616,611
Units. Upon issuance of the second tranche of the Units, Century received an
additional $5.3 million in proceeds.
On February 6, 1998, the Company accepted subscriptions for 5,000,000
shares of the Company's Common Stock, consisting of 3,800,000 newly-issued
shares and 1,200,000 shares of outstanding Common Stock offered by certain
selling shareholders. The Company received proceeds of approximately $41 million
for the newly issued shares. Such proceeds will be used for general corporate
purposes, including acquisitions. Additionally, the selling shareholders either
exercised or causedStockholders' Meeting to be exercised an aggregate of 1.4 million warrants,
resulting in additional proceeds to the Company of $3.7 million. A subscription
for 500,000 shares of the 5,000,000 shares was received from Westbury. The
purchase of these shares by an affiliate of Mr. DeGroote, who is Chairman of the
Board of Directors, President and Chief Executive Officer of Century, is
conditioned, among other things, to shareholder approval at the Annual Meeting
scheduled for April 30, 1998.
The Company had 22,379,387 warrants outstanding at December 31, 1997 with
exercise prices ranging from $1.075 to $13.06 which expire at various times
through October 18, 2000. If all warrants were exercised during this timeframe,
the Company would receive proceeds of approximately $118.4 million.
24
25
USES OF CASH AND LIQUIDITY OUTLOOK
OPERATIONS. Century made capital expenditures of $2,284,000, $286,000 and
$223,000 for the years ended December 31, 1997, 1996 and 1995, respectively,
which included expenditures for fixed assets for normal replacement, compliance
with regulations and market development. During the year ended December 31,
1997, Century funded capital expenditures from cash on hand and operating cash
flow. Century anticipates that during 1998, it will continue to fund
expenditures from operating cash flow supplemented by borrowing under its
revolving credit facility, as necessary. Management believes that Century
currently has sufficient cash and lines of credit to fund current operations and
expansion thereof.
Cash used in investing activities for the years ended December 31, 1997,
1996 and 1995 primarily came as the result of differences in the purchases and
sales of investments and the effect of certain business acquisitions.
Century is required to establish a reserve for unearned premiums. Century's
principal costs and factors in determining the level of profit are the
difference between premiums earned and losses, LAE and agent commissions. Loss
and LAE reserves are estimates of what an insurer expects to pay on behalf of
claimants. Century is required to maintain reserves for payment of estimated
losses and LAE for both reported claims and for IBNR claims. Although the
ultimate liability incurred by Century may be different from current reserve
estimates, management believes that the reserves are adequate.
Century believes its cash flow from operations and available financial
resources provide for adequate liquidity to fund existing and anticipated
capital and operational requirements as well as to fund future growth and
expansion. Management is not aware of any current recommendations by regulatory
authorities that, if implemented, could have a material impact on Century's
liquidity, capital resources and operations.
YEAR 2000. The Company's business depends in part upon its ability to
store, retrieve, process and manage significant databases and periodically, to
expand and upgrade its information processing capabilities. The Company
recognizes the need to ensure its operations will not be adversely impacted by
Year 2000 software failures. The Company has reviewed and continues to review,
on a regular basis, its computer equipment and software systems with regard to
Year 2000 problems. The Company has formulated a plan and methodology for
addressing Year 2000 problems and is currently implementing such plans.
ACQUISITIONS. Century's strategy is to expand aggressively its specialty
insurance and business outsourcing services operations through internal growth
and by acquiring and integrating existing businesses. Century makes its decision
to acquire or invest in businesses based on financial and strategic
considerations. The Company normally funds its acquisitions through a
combination of restricted Common Stock and cash. See "Business and
Properties -- Business Strategy." The businesses acquired to date, with one
exception, have been accounted for under the purchase method of accounting and,
accordingly, are included in the financial statements from the date of
acquisition.
On November 14, 1997, the Company filed two shelf registration statements with the
Securities and Exchange Commission to register an aggregateno later than 120 days after the end of
7,729,468 shares of Common Stock to be issued from time to time in connection
with acquisitions and up to an aggregate of $125,000,000 of debt securities,
Common Stock or Warrants to be issued and sold from time to time by the Company.
The registration statements became effective in December 1997. To date, the
Company has not issued any securities under either registration statement.
Management believes that Century currently has sufficient resources,
including cash on hand, cash flow from operating activities, credit facilities
and access to financial markets to fund current and planned operations, service
any outstanding debt and make certain acquisitions. However, substantial
additional capital may be necessary to fully implement Century's aggressive
acquisition program. There can be no assurance that additional financing will be
available on a timely basis, if at all, or that it will be available in the
amounts or on terms acceptable to Century.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact
25
26
included in this Annual Report, including without limitation, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy and plans and
objectives for future performance are forward-looking statements.
Forward-looking statements are commonly identified by the use of such terms and
phrases as "intends," "estimates," "expects," "projects," "anticipates,"
"foreseeable future," "seeks," and words or phases of similar import. Such
statements are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Among the key factors that may have a
direct bearing on Century's results of operations and financial condition are:
(i) Century's ability to grow through acquisitions of strategic and
complementary businesses; (ii) Century's ability to finance such acquisitions;
(iii) Century's ability to manage growth; (iv) Century's ability to integrate
the operations of acquired businesses; (v) Century's ability to attract and
retain experienced personnel; (vii) Century's ability to store, retrieve,
process and manage significant databases; (vii) Century's ability to manage
pricing of its insurance products and adequately reserve for losses; (ix) the
impact of current and future laws and governmental regulations affecting
Century's operations; and (x) market fluctuations in the values or returns on
assets in Century's investment portfolios.
ITEM 7A.
QUANTITATIVE INFORMATION ABOUT MARKET RISK. The Company does not engage in
trading market risk sensitive instruments. Neither does the Company purchase as
investments, hedges or for purposes "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has issued
no debt instruments, entered into no forward or futures contracts, purchased no
options and entered no swaps.
QUALITATIVE INFORMATION ABOUT MARKET RISK. The Company's primary market
risk exposure is that 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 the Company could borrow funds under its Credit Facility.
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 14(a) hereof.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of Directors" in the
Company's definitive proxy statement (the "Proxy Statement") relating to the
1998 Annual Stockholders Meeting (the "Annual Meeting"), is incorporated herein
by reference. The information regarding directors and executive officers of the
Company is contained in Part I of this Annual Report under a separate item
captioned "Directors and Executive Officers of Century Business Services, Inc."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation" in the
Proxy Statement relating to the Annual Meeting is incorporated herein by
reference.CBIZ's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy StatementInformation with respect to this item is incorporated herein
by reference.
26
27reference from
CBIZ's definitive proxy statement for the 2003 Annual Stockholders' Meeting to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of CBIZ's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain agreements and transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
CBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
properties owned indirectly by and leased from persons employed by CBIZ. In the
aggregate, CBIZ paid approximately $0.8 million, $1.5 million and $1.5 million
for the years ended 2002, 2001 and 2000, respectively, under such leases which
management believes were at market rates.
Rick L. Burdick, a director of CBIZ, is a partner of Akin Gump Strauss
Hauer & Feld LLP Akin Gump performed legal work for CBIZ during 2002, 2001 and
2000 for which the firm received $119,064, $68,540 and $116,000 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, 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 both in existence at the time CBIZ acquired the former company, of which
Mr. O'Byrne was an owner.
CBIZ has divested several operations during 2002, in an effort to
rationalize the business and sharpen the focus on non-strategic businesses. In
accordance with this strategy, CBIZ has sold and may sell in the future
businesses to former employees or shareholders. Management believes these
transactions were priced at market rates, competitively bid, and entered into at
arm's length terms and conditions. See note 17 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 evaluated 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 appearingrequired to be
disclosed in our filings and submissions under the captions "Certain RelationshipsExchange Act is recorded,
processed, summarized, and Related Transactions"reported within the time periods specified in the
Proxy Statement is incorporated herein by
reference.Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation of the internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements.
As to financial statements and supplementary information, reference
is made to "Index to Financial Statements" on page F-1 of this
Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to "Index to
Financial Statements" on page F-1 of this Annual Report.
3. Exhibits.
The following documents are filed as exhibits to this Form 10-K
pursuant to Item 601 of Regulation S-K.
31
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the CompanyCBIZ
(filed as Exhibit 3.1 to the Company'sCBIZ'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 the CompanyCBIZ dated October 18, 1996 (filed as Exhibit 3.2 to
the Company'sCBIZ's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
3.3*3.3 Certificate of Amendment of the Certificate of Incorporation
of CBIZ effective December 23, 1997 (filed as Exhibit 3.3 to
CBIZ's Annual Report on Form 10-K for the Company
effective October 23, 1997.year ended
December 31, 1997, and incorporated herein by reference).
3.4 Certificate of Amendment of the Certificate of Incorporation
of CBIZ dated September 10, 1998 (filed as Exhibit 3.4 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference).
3.5 Amended and Restated Bylaws of the CompanyCBIZ (filed as Exhibit 3.2 to
the
Company'sCBIZ'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 the CompanyCBIZ (filed as
Exhibit 4.1 to the Company's Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference).
4.2 Promissory Note, dated October 18, 1996, in the original aggregate principal
amount of $4.0 million issued by the Company payable to Alliance Holding (filed
as Exhibit 99.7 to the Company's Current Report on Form 8-K dated October 18,
1996, and incorporated herein by reference).
4.3* Form of Warrant for the purchase of the Company's Common Stock.
10.1 Credit Agreement dated as of October 2, 1997 by and among Century and its
Subsidiaries, as Borrowers, and Bank of America National Trust and Savings
Association, as Agent and Letter of Credit Bank (filed as Exhibit 10.1 to the
Company's Report on Form 10-Q for the period ended September 30, 1997, and
incorporated herein by reference).
27
28
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------
10.2 Agreement and Plan of Merger by and among Century Business Services, Inc.,
Republic/CSA Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to the Company's Definitive
Schedule 14C Information Statement dated September 23, 1996 and incorporated
herein by reference).
10.3 Amendment No. 1 to Agreement and Plan of Merger by and among Century Business
Services, Inc. Republic/CSA Acquisition Corporation, Republic/CSU Acquisition
Corporation, Alliance Holding, CSC and CSU (filed as Appendix IV to the
Company's Definitive Schedule 14C Information Statement dated September 23,
1996 and incorporated herein by reference).
10.4 Amendment No. 2 to Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation, Alliance
Holding, CSC and CSU (filed as Appendix V to the Company's Definitive Schedule
14C Information Statement dated September 23, 1996 and incorporated herein by
reference).
10.5 Agreement and Plan of Merger by and among Century Business Services, Inc.,
Century/SMR Acquisition Co., SMR and its shareholders dated November 30, 1996
(filed as Exhibit 10.18 to the Company'sCBIZ's Annual Report on Form 10-K for the year
ended December 31, 19961998, and incorporated herein by
reference).
10.64.4 CBIZ Business Services Employee Stock Investment Plan (filed
as exhibit 4.4 to CBIZ's Report on Form S-8 filed June 1,
2001, and incorporated herein by reference).
10.1 Form of Warrant to purchase 900,000 shares of CBIZ's common
stock issued to Jackson National Life Insurance Company
(filed as Exhibit 10.2 to CBIZ's Annual Report Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference).
10.2 1996 Employee Stock Option Plan (filed as Appendix I to
the Company'sCBIZ's Proxy Statement 1997 Annual Meeting of Stockholders
dated April 1, 1997 and incorporated herein by reference).
10.7*10.3 Amendment to the 1996 Employee Stock Option Plan effective December 8, 1997.
10.8 Agents 1997 Stock Option Plan (filed as
Appendix IIExhibit 99.2 to the Company's Proxy
Statement 1997 Annual Meeting of StockholdersCBIZ's Current Report on Form 8-K dated
April 1, 1997December 14, 1998, and filed January 12, 1999 and
incorporated herein by reference).
10.9* Subscription10.4 Amendment to the 1996 Employee Stock Option Plan (filed on
Secretary's Certificate as Exhibit 10.10 to CBIZ's Annual
Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference).
10.5 Severance Protection Agreement by and between Century
Business Services, Inc. and Westbury (Bermuda) Ltd.Jerome P. Grisko, Jr. (filed as
exhibit 10.11 to CBIZ's Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
10.6 Severance Protection Agreement by and between Century
Business Services, Inc. and Charles D. Hamm, Jr. (filed as
exhibit 10.12 to CBIZ's Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
10.7 Employment Agreement by and between Century Business
Services, Inc. and Steven L. Gerard. (filed as exhibit 10.13
to CBIZ's Report on Form 10-K for the year ended December
31, 2000, and incorporated herein by reference).
10.8 Employment Agreement by and between Century Business
Services, Inc. and Ware H. Grove. (filed as exhibit 10.14 to
CBIZ's Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
10.9 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., dated February 6, 1998.Bank of America, N.A. as Agent,
Issuing Bank, and Swing Line Bank, and the Other Financial
Institutions Party Hereto (filed as exhibit 10.17 to CBIZ's
Report on Form 10-Q for the period ended September 30, 2002,
and incorporated herein by reference).
21.1* List of Subsidiaries of Century Business Services, Inc.
24.1*23* Consent of KPMG Peat Marwick LLP.LLP
24* Powers of attorney (included on the signature page hereto).
32
EXHIBIT NO. DESCRIPTION
- ----------- -----------
99.1* Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2* Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- ---------------
* Indicates documents filed herewith.
(b) Reports on Form 8-K
Century Business Services, Inc. filed theThe following Current Reports on
Form 8-K during 1997: Current Report on Form 8-K dated February 19, 1997, as amended on Form
8-K/Awas filed on April 2, 1997.
Current Report onduring the three months
ended December 31, 2002:
(a) On October 10, 2002, CBIZ filed a Form 8-K dated April 3, 1997.
Current Report on Form 8-K dated April 21, 1997.
Current Report on Form 8-K dated July 23, 1997,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 amended on Form
8-K/A dated October 3, 1997.
28Chairman 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
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Century has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTURY BUSINESS SERVICES, INC.
(Registrant)
By: /s/ GREGORY J. SKODAWARE H. GROVE
------------------------------------
Gregory J. Skoda
Executive Vice President
February 17, 1998Ware H. Grove
Chief Financial Officer March 24,
2003
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below on this Annual Report hereby constitutes and appoints Michael G. DeGrooteSteven L. Gerard and
Gregory J. SkodaWare H. Grove, and each of them, with full power to act without the other, his
true and lawful attorney-in-fact and agent, with full power of substitution for
him and his name, place and stead, in any and all capacities (until revoked in writing),
to sign any and all amendments to this Annual Report of Century Business
Services, Inc. and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorneys-in-factattorney-in-fact and agents,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 of said attorneys-in-factattorney-in-fact and agents,agent, or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report has been signed below by the following persons on
behalf of Century Business Services, Inc. and in the capacities and on the date
indicated above.
/s/ MICHAEL G. DEGROOTESTEVEN L. GERARD /s/ JOSEPH S. DIMARTINO
- ---------------------------------------- ----------------------------------------
Michael G. DeGroote-------------------------------------------- --------------------------------------------
Steven L. Gerard Joseph S. DiMartino
Chairman and Chief Executive Officer President, Director
Chairman of the Board and Director
/s/ GREGORY J. SKODAWARE H. GROVE /s/ HARVE A. FERRILL
- ---------------------------------------- ----------------------------------------
Gregory J. Skoda-------------------------------------------- --------------------------------------------
Ware H. Grove Harve A. Ferrill
Executive Vice President Director
and Director
/s/ CHARLES DELL HAMM, JR. /s/ HUGH P. LOWENSTEIN
- ---------------------------------------- ----------------------------------------
Charles Dell Hamm, Jr. Hugh P. Lowenstein
Chief Financial Officer Director
(Principal Financial Director
and Accounting Officer)
/s/ RICK L. BURDICKGARY W. DEGROOTE /s/ RICHARD C. ROCHON
- ---------------------------------------- ------------------------------------------------------------------------------------ --------------------------------------------
Gary W. DeGroote Richard C. Rochon
Director Director
/s/ RICK L. BURDICK
- --------------------------------------------
Rick L. Burdick
Richard C. Rochon
Director Director
2934
30
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report........................................................Report ............................. F-2
Consolidated and Combined Balance Sheets as of December 31, 19972002 and
1996.......................................................2001................................................... F-3
Consolidated and Combined Statements of Income ForOperations for the Years Endedyears ended
December 31, 1997, 19962002, 2001 and 1995.................................................2000 ...................... F-4
Consolidated and Combined Statements of Shareholders'Stockholders' Equity Forfor the
Years Endedyears ended December 31, 1997, 19962002, 2001 and 1995.................................................2000........... F-5
Consolidated and Combined Statements of Cash Flows Forfor the Years Endedyears ended
December 31, 1997, 19962002, 2001 and 1995.................................................2000....................... F-6
Notes to the Consolidated and Combined Financial Statements.............................Statements............ F-7
Schedule III -- Summary of Investments -- Other than Investments in Related
Parties as ofValuation and Qualifying Accounts and
Reserves for the years ended December 31, 1997.................................................. F-28
Schedule III -- Supplementary Insurance Information For the Years Ended
December 31, 1997, 19962002, 2001
and 1995................................................. F-29
Schedule IV -- Reinsurance For the Years Ended
December 31, 1997, 1996 and 1995.................................................2000............................................... F-30
Certification of Principal Executive Officer.............. F-31
Certification of Principal Financial Officer.............. F-32
F-1
31
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
CENTURY BUSINESS SERVICES, INC.The Board of Directors and Stockholders
Century Business Services, Inc.:
We have audited the accompanying consolidated and combined financial statements of Century Business
Services, Inc. and Subsidiaries (Company) as listed in the accompanying index on
page F-1. In connection with our audits of the consolidated and combined financial
statements, we also have also audited the consolidated financial statement schedulesschedule
as listed in the accompanying index on page F-1. These consolidated and combined financial
statements and financial statement schedulesschedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated and combined financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to above
present fairly, in all material respects, the financial position of Century
Business Services, Inc. and Subsidiaries atas of December 31, 19972002 and 1996,2001, and
the results of their operations shareholders' equity and their cash flows for each of the years in
the three-year period ended December 31, 1997,2002, in conformity with accounting
principles generally accepted accounting principles.in the United States of America. Also, in our
opinion, the related financial statement schedules,schedule, when considered in relation
to the basic consolidated and combined financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in note 1 note 18 to the consolidated financial statements,
the Company adopted Securities and Exchange Commission Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements," and changed certain
revenue recognition policies effective January 1, 2000.
As discussed in notes 1 and 6 to the consolidated 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/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
February 17, 19987, 2003
F-2
32
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1997 AND 1996
1997 1996
--------2002 2001
--------- --------
ASSETS
Current assets:
Cash and cash equivalents..............................................equivalents................................. $ 21,1486,351 $ 39,8744,340
Restricted cash........................................... 16,980 13,403
Accounts receivable, less allowancenet.................................. 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 doubtful accounts of $1,472 and
$0, respectively..................................................... 32,235 598
Premiums receivable, less allowancesale........................ 9,566 20,491
--------- --------
Current assets before funds held for doubtful accounts of $281 and
$284, respectively................................................... 7,812 7,013
Investments (Note 4):
Fixed maturitiesclients...... 153,530 172,291
Funds held to maturity, at amortized cost................. 14,528 15,481
Securities available for sale, at fair value......................... 59,138 44,684
Mortgage loans....................................................... 1,839 3,685
Short-term investments............................................... 4,215 4,799
--------clients...................................... 49,217 41,049
--------- --------
Total investments................................................. 79,720 68,649current assets.............................. 202,747 213,340
Property and equipment, net................................. 44,600 52,945
Notes receivable -- non-current............................. 7,585 5,000
Deferred policy acquisition costs (Note 8)............................. 4,478 4,345
Reinsurance recoverables (Note 7)...................................... 15,215 11,185
Excess of cost over netincome 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 acquired, net of
accumulated amortization of $1,297 and $33, respectively (Note 2).... 89,856 6,048
Net assets held for disposal (Note 15)................................. -- 22,999
Notes receivable (Note 15)............................................. 16,579 --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 assets........................................................... 20,524 6,619non-current liabilities............................... 4,936 2,934
--------- --------
Total liabilities................................. 138,793 157,702
--------- --------
TOTAL ASSETS........................................................... $287,567 $167,330
======== ========
LIABILITIES
Accounts payable....................................................... $ 9,437 $ 136
Losses and loss expenses payable (Note 6).............................. 50,655 41,099
Unearned premiums...................................................... 22,656 18,637
Notes payable, bank debt and capitalized leases (Note 11).............. 20,312 3,211
Income taxes (Note 10)................................................. 2,958 1,994
Accrued expenses....................................................... 27,167 5,355
Other liabilities...................................................... 6,472 5,576
-------- --------
TOTAL LIABILITIES...................................................... 139,657 76,008
-------- --------
SHAREHOLDERS'STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
(Note 5)
Authorized -- 100,000,000 shares
IssuedShares authorized 250,000; Shares issued and
outstanding -- 41,464,099 shares at December 31, 1997;
-- 33,764,506 shares at December 31, 1996... 415 33895,121 and 94,879......................... 951 949
Additional paid-in capital............................................. 127,517 80,446
Retained earnings...................................................... 18,372 6,842
Net unrealized appreciation of investments (net of tax)................ 1,606 3,696capital.................................. 439,684 439,136
Accumulated deficit......................................... (144,754) (67,906)
Treasury stock.............................................. (1,308) (1,308)
Accumulated other comprehensive loss........................ (255) (224)
--------- --------
--------
TOTAL SHAREHOLDERS' EQUITY............................................. 147,910 91,322
-------- --------Total stockholders' equity........................ 294,318 370,647
Commitments and contingencies
(Note 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $287,567 $167,330
========--------- --------
Total liabilities and stockholders' equity........ $ 433,111 $528,349
========= ========
See the accompanying notes to the consolidated and combined financial statements.
F-3
33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOMEOPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 19952002 2001 2000
-------- ------- --------------- ---------
Revenues:
Business services fees and commissions.....................Revenue..................................................... $504,335 $516,892 $ 63,411 $ 1,606 $ --
Specialty insurance services (regulated):
Premiums earned (Note 7)................................ 37,238 27,651 26,962
Net investment income (Note 4).......................... 4,524 3,564 3,341
Net realized gains on investments (Note 4).............. 3,044 1,529 166
Other income............................................ 13 1,419 470
---------551,171
Operating expenses.......................................... 445,666 447,513 490,581
-------- -------- Total revenues........................................ 108,230 35,769 30,939
Expenses:
Operating expenses -- business services.................... 50,277 1,107 --
Losses and loss adjustment expenses (Note 7)............... 20,682 17,624 15,117
Policy acquisition expenses (Note 8)....................... 9,670 7,699 7,774---------
Gross margin................................................ 58,669 69,379 60,590
Corporate general and administrative expenses.............. 4,578 302 --administrative........................ 19,672 19,797 24,694
Depreciation and amortization expenses..................... 2,612 320 --
Other expenses............................................. 2,331 2,655 3,157
---------amortization............................... 20,657 40,636 43,339
-------- -------- Total expenses........................................ 90,150 29,707 26,048
Income from continuing operations before net corporate
interest---------
Operating income and(loss)..................................... 18,340 8,946 (7,443)
-------- -------- ---------
Other income tax expense..................... 18,080 6,062 4,891
Net corporate interest income................................ 965(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.................................................... 19,045 6,062 4,891expense................................................... 15,680 (1,025) (89,919)
Income tax expense (Note 10)................................. 6,280 1,640 1,422
---------expense.......................................... 8,124 12,192 1,514
-------- -------- ---------
Income (loss) from continuing operations............................ 12,765 4,422 3,469operations.................... 7,556 (13,217) (91,433)
Loss from operations of discontinued business (netbusinesses, net of
income tax expense (benefit) of $(316)$367, ($1,855) and
($6,154), $91 and $0,
respectively).............................................. 663 38 --respectively.................................... (1,926) (2,783) (17,041)
Loss on disposal of discontinued business (netbusinesses, net of income
tax benefit of $305 in 1997) (Note 15)......................... 572$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 income............................................ $ 11,530 $ 4,384 $ 3,469
=========loss.................................................... $(76,848) $(16,000) $(126,076)
======== ======== =========
Earnings (loss) per share (Note 3):share:
Basic:
Income from continuing operations.......................Continuing operations.................................. $ 0.350.08 $ 0.25(0.14) $ 0.24
Loss from discontinued operations....................... (0.04)(0.96)
Discontinued operations................................ (0.05) (0.03) (0.24)
Cumulative effect of change in accounting principles... (0.84) -- --
---------(0.13)
-------- -------- ---------
Net income per share..................................loss............................................... $ 0.31(0.81) $ 0.25(0.17) $ 0.24
=========(1.33)
======== ======== =========
Diluted:
Income from continuing operations.......................Continuing operations.................................. $ 0.260.08 $ 0.18(0.14) $ 0.20
Loss from discontinued operations....................... (0.02)(0.96)
Discontinued operations................................ (0.05) (0.03) (0.24)
Cumulative effect of change in accounting principles... (0.82) -- ---------(0.13)
-------- -------- ---------
Net income per share..................................loss............................................... $ 0.24(0.79) $ 0.18(0.17) $ 0.20
=========(1.33)
======== ======== Weighted average=========
Weighted-average common shares.......................... 36,940 17,863 14,760
=========shares outstanding:
Basic.................................................. 94,810 94,818 94,674
======== ======== Weighted average common shares and dilutive potential
common shares......................................... 48,904 24,032 16,956
=========
Diluted................................................ 96,992 94,818 94,674
======== ======== =========
See the accompanying notes to the consolidated and combined financial statements.
F-4
34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS'STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 19962002, 2001 AND 19952000
(IN THOUSANDS)
NETRETAINED ACCUMULATED
ADDITIONAL UNREALIZEDEARNINGS UNEARNED OTHER
COMMON PAID-IN RETAINED APPRECIATION(ACCUM. ESOP TREASURY COMPREHENSIVE
SHARES STOCK CAPITAL EARNINGS (DEPRECIATION)
----------DEFICIT) SHARES STOCK INCOME (LOSS) TOTALS
------ ------ ---------- --------- ---------------------- -------- ------------- ---------
December 31, 1994..................... 14,760,000 $1481999........... 93,341 $933 $443,052 $ 18,55174,170 $(1,795) $ 6,089(754) $(2,474) $ (1,208)513,132
Comprehensive loss:
Net income..........................loss................ -- -- -- 3,469 --
Pre-merger capital contribution from
parent........................... -- -- 595 -- --
Pre-merger dividends paid to
parent...........................(126,076) -- -- -- (5,350) --
Change in unrealized depreciation,
net of deferred taxes............ -- -- -- -- 4,474
----------- ----- --------- -------- -------
December 31, 1995..................... 14,760,000 148 19,146 4,208 3,266
Net income.......................... -- -- -- 4,384 --
Pre-merger capital contribution from
parent........................... -- -- 595 -- --
Pre-merger dividends paid to
parent........................... -- -- -- (1,750) --(126,076)
Change in unrealized
appreciation, net
of deferred taxes............tax............. -- -- -- -- 430
Reverse merger...................... 10,858,158 108 16,136 -- -- Stock issuances..................... 7,251,888 73 38,164 --
Stock options....................... 101,960 1 1,153 -- --
Business acquisitions............... 792,500 8 5,252 -- --
----------- -----2,444 2,444
------ ---- -------- --------- -------- ------- December 31, 1996..................... 33,764,506 338 80,446 6,842 3,696
Net income..........................------- ------- ---------
Total comprehensive
loss............. -- -- -- 11,530(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 deferred taxes............tax............. -- -- -- -- (2,090)
Reverse merger
Stock issuances..................... 616,611 6 5,261 -- -- Stock options....................... 53,032 1 334(194) (194)
------ ---- -------- --------- ------- ------- ------- ---------
Total comprehensive
loss............. -- -- Warrants............................ 533,032 5 2,819-- (16,000) -- -- Business acquisitions............... 6,496,918 65 38,657(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, 1997..................... 41,464,099 $4152001........... 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) $ 127,517 $18,372-- $(1,308) $ 1,606
=========== =====(255) $ 294,318
====== ==== ======== ========= ======== ======= ======= ======= =========
See the accompanying notes to the consolidated and combined financial statements.
F-5
35
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 19962002, 2001 AND 19952000
(IN THOUSANDS)
1997 1996 19952002 2001 2000
--------- -------- -------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:Cash flows from operating activities:
Net income from continuing operations............................loss.................................................. $ 12,765 $ 4,422 $ 3,469(76,848) $(16,000) $(126,076)
Adjustments to reconcile net incomeloss to net cash provided by
operating activities:
Gain on sale of business.................................... (171)Goodwill impairment.................................... -- -- Net loss32,953
Loss from operationsdiscontinued operations...................... 1,926 2,783 17,041
Loss on divestiture of discontinued business........... (663) (38)operations......... 2,471 -- Net5,697
(Gain) loss on disposaldivested operations..................... (930) 7,113 31,576
Bad debt expense, net of discontinued business............... (572)recoveries.................... 7,201 8,059 21,887
Accounts receivable reduction due to change in
accounting principle................................. -- -- Deprecation19,209
Cumulative effect of change in accounting principle.... 80,007 -- 11,905
Depreciation and amortization................................ 12,282 7,969 8,143amortization.......................... 20,657 40,636 43,339
Deferred income taxes....................................... (958) (27) (699)
Cash provided by (used in) changestaxes.................................. (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.................................. (13,437)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............................................. -- --
Premiums receivable, net.................................. 3,117 (915) (62)
Deferred policy acquisition costs......................... (9,803) (8,616) (7,476)
Reinsurance recoverables, net............................. (4,030) 1,462 (1,671)
Other assets.............................................. (6,166) (1,540) (527)
Accounts payable.......................................... 6,069 136 --
Losses and loss expenses payable.......................... 6,947 4,097 2,341
Unearned premiums......................................... (1,582) 3,001 183
Income taxes.............................................. 889 646 725
Accrued expenses.......................................... 16,505 1,105 533
Other liabilities......................................... (1,855) 3,156 1,242
Non-cash charges and working capital changes from
discontinued operations................................. (15,620) -- --
Other, net................................................ 993 (1,693) (2,599)71 891
--------- -------- -------- -----------------
Net cash provided by operating activities...................... 4,710 13,165 3,602continuing 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:
Purchase of fixed maturities, held to maturity................... (869) (1,318) (269)
Purchase of fixed maturities, available for sale................. (21,222) (12,408) (9,552)
Purchase of equity securities, available for sale................ (2,816) (2,921) (228)
Redemption of fixed maturities, held to maturity................. 1,172 1,000 1,281
Sale of fixed maturities, available for sale..................... 6,006 9,333 7,089
Sale of equity securities, available for sale.................... 1,285 675 150
Increase in mortgage loans....................................... -- (1,275) (1,342)
Principal receipts on mortgage loans............................. 1,846 983 910
Change in short-term investments................................. 584 (3,956) 27---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired...................... (35,822) 912 --acquired and contingent
consideration.......................................... (4,553) (1,665) (8,973)
Proceeds from dispositions of businesses......................... 10,700divested operations......................... 3,122 14,005 6,599
Proceeds from discontinued operations..................... 4,639 -- --
Acquisition of28,000
Additions to property and equipment, net....................... (2,284) (286) (223)net.................. (8,157) (12,680) (19,670)
Net (increase) decrease in notes receivable............... 1,902 (842) 2,194
--------- -------- -------- -----------------
Net cash used inprovided by (used in) investing
activities.......................... (41,420) (9,261) (2,157)activities...................................... (3,047) (1,182) 8,150
--------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Pre-merger dividends paid to parent.............................. -- (1,750) (5,350)---------
Cash flows from financing activities:
Proceeds from debt............................................... 13,416 -- --
Repaymentbank debt................................... 62,600 27,900 102,600
Proceeds from notes payable and capitalized leases........ 607 478 3,296
Payment of debt................................................ (6,233) (836) (295)bank debt...................................... (100,100) (90,400) (129,100)
Payment of notes payable and capitalized leases........... (899) (3,770) (10,534)
Proceeds from stock issuances.................................... 5,267 38,237issuances, net of treasury
repurchase............................................. -- (410) 17
Proceeds from exercise of stock options and warrants............. 3,159 -- --warrants...... 550 115 124
--------- -------- -------- -----------------
Net cash provided by (used in)used in financing activities............ 15,609 35,651 (5,645)activities............. (37,242) (66,087) (33,597)
--------- -------- -------- -----------------
Net increase (decrease)decrease in cash and cash equivalents............... (21,101) 39,555 (4,200)equivalents................... 2,011 (11,630) (8,770)
Cash and cash equivalents at beginning of year..................... 42,249 2,694 6,894year.............. 4,340 15,970 24,740
--------- -------- -------- -----------------
Cash and cash equivalents at the end of year:
Continuing operation............................................. 21,148 39,874 2,694
Discontinued operations.......................................... -- 2,375 --
-------- -------- --------
Total cash and cash equivalents at end of year.....................year.................... $ 21,1486,351 $ 42,2494,340 $ 2,69415,970
========= ======== ======== =================
See the accompanying notes to the consolidated and combined financial statements.
F-6
36
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Century Business Services, Inc. and its wholly-owned subsidiaries (the "Company") is(CBIZ)
are a diversified services organizationcompany which, acting through its subsidiaries,
provides professional outsourced business services including specialty insurance services,primarily to small and
medium sized commercialmedium-sized businesses, as well as individuals, governmental entities, and
not-for-profit enterprises throughout the United States.
RESI Transaction
On October 18, 1996, Republic Environmental Services, Inc. ("RESI") issued
(a) an aggregate of 14,760,000 shares of RESI common stock, par value $0.01 per
share ("RESI Common Stock"), (b) warrants to purchase an aggregate of 4,200,000
additional shares of RESI Common Stock at exercise prices ranging from $2.625 to
$3.875 per share, expiring in two to four yearsStates and (c) a promissory note in
principal amount of $4,000,000 in exchange for the stock of Century Surety
Company ("CSC")Toronto, Canada.
CBIZ offers integrated services through its three practice groups: accounting,
tax and Commercial Surety Agency, Inc. d.b.a. Commercial Surety
Underwriters ("CSU") (together the "Alliance Companies") ("the RESI
Transaction"). The RESI transaction was accounted for as a reverse merger
whereby the Alliance Companies gained a controlling interest in the stock of
RESI. Contemporaneously, RESI changed its name to International Alliance
Services, Inc. On June 24, 1996, the Company began trading under the symbol
"IASI" in anticipation of the merger with Alliance Companies, which ultimately
resulted in a change of its name to Century Business Services, Inc.
The consolidatedadvisory services, benefits and combined financial statements presented herein are as
follows:
i. Consolidatedinsurance services, and Combined Balance Sheets of the Company at
December 31, 1997 and 1996;
ii. Consolidated and Combined Statements of Income of the Company for
the years ended December 31, 1997, 1996 and 1995:
iii. Consolidated and Combined Statements of Shareholders' Equity of
the Company for the years ended December 31, 1997, 1996 and 1995;
iv. Consolidated and Combined Statements of Cash Flows of the Company
for the years ended December 31, 1997, 1996 and 1995.
The following are significant accounting policies followed by the Company.national
practices.
Basis of Consolidation
The Company'saccompanying consolidated and combined financial statements include the accounts of
all wholly owned subsidiaries.CBIZ. All significant intercompany accounts and transactions have been eliminated in
consolidation.
AccountingUse of Estimates
In preparingPreparing the consolidated and combined financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management
is required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated and combined financial statements
and the reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those estimates.
Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of losses and loss expenses payable, the recoverability of
deferred policy acquisition costs, and the net realizable value of reinsurance
recoverables and net assets held for disposal.
Management believes that the recorded liability for losses and loss
expenses is adequate. While management uses available information to estimate
losses and loss expenses payable, future changes to the liability may be
necessary based on claims experience and changing claims frequency and severity
of conditions. Management
F-7
37
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
also believes that deferred policy acquisition costs are recoverable, however,
future costs that are associated with the business in the unearned premium
liability could exceed management's estimates, causing the recorded asset to be
unrecoverable in whole or in part. In addition, management's estimates of
amounts recoverable from reinsurers, net of valuation allowance, are believed to
be consistent with the claim liability, but the actual amounts recoverable could
differ from those estimates. The amounts the Company will ultimately realize
from the sale of the net assets held for disposal could differ from management's
estimates of their realizable value.
Cash and Cash Equivalents
Cash and cash equivalents consists of funds heldinclude cash on deposithand and short-term highly liquid
investments with a maturity of three months or less at the date of purchase. AtThe
carrying amount approximates fair value because of the short maturity of those
instruments.
Restricted Cash
Restricted cash represents fees earned by CBIZ in relation to its capital
and investment advisory services, as those funds are restricted in accordance
with applicable NASD regulations, funds on deposit from clients in connection
with the administering and settling of claims, and the pass through of insurance
premiums to the carrier. The related liability for these funds is recorded in
accrued expenses and other liabilities in the consolidated balance sheets.
Funds Held for Clients and Client Funds Obligations
As part of its payroll and payroll tax filing services, CBIZ is engaged in
the preparation of payroll checks, federal, state, and local payroll tax
returns, and the collection and remittance of payroll obligations. In relation
to its payroll services, CBIZ collects payroll funds from its client's account
in advance of paying the client's employees. Likewise, for its payroll tax
filing services, CBIZ collects payroll taxes from its clients in advance of
paying the various timestaxing authorities. Those funds that are collected before
they are due are invested in short-term investment grade instruments. The funds
held for clients and the related client fund obligations are included in the
consolidated balance sheets as current assets and current liabilities,
respectively. The amount of collected but not yet remitted funds for CBIZ's
payroll and tax filing services varies significantly during the year,year.
Derivative Instruments and Hedging Activities
In January 2001, CBIZ adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that entities
recognize all derivatives as either assets or liabilities in the Company had deposits withstatement of
financial institutionsposition and measure those instruments at fair value. Gains and losses
resulting from
F-7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
changes in excessthe fair values of those derivatives are to be accounted for
depending on the use of the $100,000 federally insured limit.
Excessderivative and whether it qualifies for hedge
accounting. CBIZ entered into an interest rate swap agreement which qualifies as
a cash flow hedge in 2001. For the year ended December 31, 2002, the change in
fair value relating to CBIZ's hedging activity resulted in a loss of
Costapproximately $0.3 million, which is recorded in stockholders' equity under
accumulated other comprehensive loss.
Other Financial Instruments
The carrying amount of CBIZ's accounts receivable and accounts payable
approximates fair value because of the short maturity of these instruments. The
carrying value of bank debt approximates fair value, as the interest rate on the
bank debt is variable and approximates current market rates.
Goodwill and Other Intangible Assets
Effective June 30, 2001, CBIZ adopted Statement of Financial Accounting
Standard No., 141 "Business Combinations" (SFAS 141), which requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Intangible assets include client lists and non-compete
agreements. These intangible assets are amortized principally by the
straight-line method over Net Assetstheir expected period of Businesses Acquired
The excessbenefit not exceeding ten
years
Effective January 1, 2002, CBIZ adopted Statement of costFinancial Accounting
Standard No., 142 "Goodwill and Other Intangible Assets" (SFAS 142), which
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually at
the reporting unit level. Prior to the adoption of SFAS 142, goodwill was
amortized over periods not exceeding 15 years. 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 basis and
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of neta reporting unit below its carrying
value. CBIZ performed its annual impairment review of goodwill as of the
beginning of the fourth quarter of fiscal 2002 and determined that no impairment
of goodwill existed.
Other intangible assets, including purchased client lists and non-compete
agreements, are amortized over their estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of businesses acquired
is being amortized on a straight-line basis overLong-Lived Assets." CBIZ reviews the expected periods to be
benefited, which is generally 30 years. It iscarrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the Company's policy to evaluate
the excess of cost over the net assets of businesses acquired based on an
evaluationcarrying amount of such factors as the occurrenceassets may not be fully recoverable.
Recoverability of long-lived assets is assessed by a significant adverse event or
change in the environment in which the business operates or if the expected
future net cash flows, undiscounted and without interest, would become less thancomparison of the carrying
amount of the asset to the estimated future net cash flows expected to be
generated by the asset.
An impairment loss would be recordedInvestments
CBIZ has certain investments in privately held companies that are currently
in their start-up or development stages and are included in "other assets" in
the period such determination is made based onaccompanying consolidated balance sheets. These investments are inherently
risky as the fairmarket for the technologies or products they have under development
are typically in the early stages. The value of these investments is influenced
by many factors, including the related
businesses. Amortization expense from continuing operations was approximately
$1,334,000, $33,000operating effectiveness of these companies, the
overall health of the companies' industries, the strength of the private equity
markets and $0 in 1997, 1996 and 1995, respectively.general market conditions.
Property and Equipment
Property and equipment which is included in other assets in the
consolidated and combined balance sheets, are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided on the
straight-line basis over estimated useful lives.
F-8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," over an estimated useful life not to
exceed seven years. The cost of software purchased or developed to be marketed,
including software acquired through acquisitions of businesses, is capitalized
and amortized over its estimated economic life in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed."
Income Taxes
Income taxes are accounted for under the asset and liability method.
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
bases and operating loss and tax credit carryforwards.carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in 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. EarningsA 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, consideration of future deductible amounts,
and assessment of the consolidated and/or separate company profitability of
certain acquired entities.
Revenue Recognition and SAB 101
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. CBIZ offers a vast array of outsourced
business services to its clients. Those services are delivered through three
practice groups. A description of revenue recognition, as it relates to those
groups, is provided below:
ACCOUNTING, TAX AND ADVISORY SERVICES -- Revenue consists primarily of fees
for accounting services, preparation of tax returns and consulting services.
Revenues are recorded in the period in which they are earned. CBIZ bills clients
based upon a predetermined agreed upon fixed fee or actual hours incurred on
client projects at expected net realizable rates per Common Share
In February 1997,hour, plus any
out-of-pocket expenses. The cumulative impact on any subsequent revision in the
Financial Accounting Standards Board issued Statementestimated realizable value of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The
Company adopted this standard, as required,unbilled fees for its December 31, 1997 financial
statements. Fora particular client project is
reflected in the years presented,period in which the company presents both basicchange becomes known.
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and diluted
earnings per share. Basic earnings per share is computed by dividingagency
commissions, and fee income availablefor administering health and retirement plans.
Commissions relating to common shareholders by the weighted average number of common shares
outstandingbrokerage and agency activities whereby CBIZ has primary
responsibility for the period. Diluted earnings per share reflects the potential
dilution that could occur if common stock equivalents were exercised and then
shared in the earningscollection of premiums from insured's are generally
recognized as of the Company.
F-8latter of the effective date of 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 revenue is
reported net of sub-broker commissions. Contingent commissions are generally
recognized when received. Fee income is recognized as services are rendered.
NATIONAL PRACTICES -- The business units that comprise this group offer a
variety of services. A description of revenue recognition associated with the
primary services is provided below:
- Mergers & Acquisitions and Capital Advisory -- Revenue associated with
non-refundable retainers are recognized on a straight-line 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. Revenue associated
with installation and service agreements are recognized as
F-9
38
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Investments
In accordance with SFAS No. 115, Accounting for Certain Investments in DebtCONTINUED
services are performed and Equity Securities, all fixed maturity securities thatmaintenance agreements are recognized ratably over
the Company hasterm of the positive intent and ability to hold to maturity are classified as held to
maturity and are stated at amortized cost; all other fixed maturity securities
and all equity securities are classified as available for sale and are stated at
fair value, with the unrealized gains and losses, net of deferred income tax,
reported as a separate component of shareholders' equity. The Company has no
investment securities classified as trading. Realized gains and losses on the
sale of investments are determined on the basis of specific security
identification and also includes other than temporary declines, if any. Interest
incomeagreement. 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 straight-line basis over the accrual basis and dividend incomelife 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 ex-dividend date.
Deferred Policy Acquisition Costs
Acquisition costs, consistingfourth quarter of commissions, premium taxes2000, CBIZ adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
the Financial Statements." SAB 101 summarizes certain underwriting expenses that vary withof 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 101 and are primarily related to the
production
of business, are deferredSEC's "Frequently Asked Questions and amortized ratably over the policy term. The method
used limits the amount to its estimated realizable value which gives effect to
the premium to be earned, the incurrence of loss and loss expenses andAnswers" bulletin released on October 12,
2000, CBIZ changed certain other costs expected to be incurred as premium is earned.
Stock Optionsrevenue recognition policies effective January 1,
2000. Prior to January 1, 1996, the Company accounted for its stock option plansthis 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 provisionsfirst
quarter 2000 of Accounting Principles Board ("APB") Opinion
No. 25, Accounting$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.
Earnings per Share
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of stock options, warrants and
contingent shares.
Stock Issued to Employees, and related interpretations.
As such, compensationOptions
Compensation expense would beis recorded on the date of grant only if the current
market price of the underlying stock exceededexceeds the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provideCBIZ provides
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has electedSee note
12 to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Losses and Loss Expenses Payable
The liability for losses is provided based upon case basis estimates for
losses reported in respect to direct business; estimates of unreported losses
based on estimated loss experience; estimates received and supplementalconsolidated financial statements.
Reclassifications
Certain amounts
provided relating to assumed reinsurance; and deduction for estimated salvage
and subrogation recoverable. The liability for loss expenses is established by
estimating future expenses to be incurred in settlement of the claims provided
for in the liability for losses. The liability for losses and loss expenses is
not discounted.
Premium Recognition
Premiums are recognized as revenue in proportionprior periods consolidated financial statements have
been reclassified to conform to the insurance coverage
provided, which is generally ratable over the terms of the policies. Unearned
premiums are generally computed on the daily pro rata basis and include amounts
relating to assumed reinsurance.
Reinsurance Ceded
In accordance with SFAS No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts, reinsurance receivables are
accounted for and reported separately as assets, net of valuation allowance.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability.
F-9current year's presentation.
F-10
39
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Contracts not resultingCONTINUED
2. ACCOUNTS RECEIVABLE
Accounts receivable for the years ended December 31, 2002 and 2001 were as
follows (in thousands):
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
The notes 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 million at December 31, 2002 and 2001, respectively; (ii) the Philip
note taken in connection with the reasonable possibility thatdivestiture of the reinsurers may
realizehazardous waste operations
in 1997 with a significant loss frombalance 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 taken 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 insurance risk assumed generally do not meetPhilip Services Corporation's ability to
pay. The balances of other miscellaneous note receivables were $0.9 million and
$0.9 million for the conditionsyear ended December 31, 2002 and 2001, respectively.
4. INVESTMENTS
The investments balance of $0.6 million and $2.2 million for reinsurance accountingthe years
ended December 31, 2002 and 2001 respectively, are included in other assets
(non-current) and are accounted for as deposits.
Reinsurance premiums cededunder the cost method of accounting. CBIZ's
primary investment is in Statement One, Inc. which was purchased in 1999 and reinsurance recoveries on claims incurred are
deducted from the respective revenue and expense accounts. The Company is not
relievedhas
a carrying value of its primary obligation in a reinsurance transaction.
Business Risk
The following is a description$0.6 million which represents an ownership interest of the most significant risks facing
property and casualty insurers and how the Company mitigates those risks:
Inadequate Pricing Risk is the risk that the premium charged for insurance
and insurance related products are insufficient4%.
On September 30, 2002, this investment was written down due to cover the costs associated
with the distribution of such products which include: claim and loss costs, loss
adjustment expenses, acquisition expenses, and other corporate expenses. The
Company utilizes a variety of actuarial and other qualitative methods to set
such levels
Adverse Loss Development and Incurred But Not Reported ("IBNR") Risk is the
risk inherent in the handling and settling of claims whose ultimate costs, which
include loss costs, loss adjustment expenses, and other related expenses, are
unknown at the time the claim is presented. An associated risk relates to claims
which have been incurred, but for which the Company has no knowledge. The
Company makes judgments as to the ultimate costs of presented claims and makes a
provision for their future payment by establishing reserves for existing claims
(case reserves) and for IBNR claims, however, there can be no assurance that the
amounts reserved will be adequate to ultimately make all required payments.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will occur and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits or new legal
theories may create costs for the insurer beyond those recorded in the financial
statements. The Company is exposed to this risk by writing approximately 26% of
its business in Ohio and surrounding states and 41% in California, thus
increasing its exposure in these particular regions. This risk is reduced by
underwriting and loss adjusting practices that identify and minimize the adverse
impact of this risk.
Credit Risk is the risk that issuers of securities and mortgagors of the
mortgages owned by the Company will default, or other parties, including
reinsurers that owe the Company money, will not pay. The Company minimizes this
risk by adhering to a conservative investment strategy, by maintaining sound
reinsurance and credit and collection policies, and by providing for any amounts
deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause a decrease in the
valuemarket valuation of an insurer's investments. The Company mitigates this
risk by attemptingthe investment. CBIZ also holds a 3% ownership interest in
QuikCAT Technologies, however management doubts QuikCAT's ability to matchreach
profitability and, as such, has considered the maturity scheduleQuickCAT investment fully
impaired. In September 2002, CBIZ wrote-off the QuickCAT investment of its assets with the
expected payouts$1.3
million and a related outstanding trade receivable of its liabilities. To the extent that liabilities come due
more quickly than assets mature, an insurer would have to sell assets prior to
maturity$0.5 million.
5. PROPERTY AND EQUIPMENT
Property and recognize a gain or loss. Management believes that the Company's
positive cash flow from investment income and operations will enable the Company
to operate without having to recognize significant losses from the sale of
investments that have an unrealized holding loss as ofequipment, net at December 31, 1997.
Reclassifications
Certain reclassifications have been made to2002 and 2001 consisted of the
1996following (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
======== ========
Depreciation expense was approximately $16.0 million, $14.5 million, and
1995 financial
statements to conform to the 1997 presentation.
F-10$14.0 million in 2002, 2001 and 2000, respectively.
F-11
40
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
During fiscal 1997, the Company continued its strategic acquisition
program, purchasing the businessesCONTINUED
6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of 39 complementary companies. These
acquisitions comprised the following:intangible assets, net are 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
======== ========
Client lists are primarily amortized over a period not to exceed ten accounting systemsyears.
Other intangibles, which consist primarily of non-compete agreements,
expirations, trademarks and tax advisory
businesses, including Comprehensive Business Services, Inc. ("Comprehensive"),website costs; and are amortized over a franchisor of accounting services; eight specialty insurance businesses; four
workers' compensation administration businesses;period
ranging from three to ten payroll administration/
benefits design and administration firms; three human resources/executive search
firms; one valuation and appraisal group; two technology firms; and one
broker/dealer.
These acquisitions, with the exception of Business Management Services,
Inc. and BMS Employee Benefits, Inc., (collectively, "BMS") were accounted for
as a purchase, and accordingly, the operating results of the acquired companies
have been includedyears.
Changes in the accompanying consolidated and combined financial
statements since the dates of acquisition. The BMS acquisition was accounted for
using the "pooling of interests" method of accounting. The Company's prior
period financial statements have not been restatedgoodwill for the BMS acquisitionyear ended December 31, 2002 are as the transactionfollows:
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, goodwill was considered immaterial.
The aggregate purchase price of the aforementioned acquisitions was
approximately $87.748 million, and includes future contingent consideration of
up to $5.880 million in cash and 1,716,226 shares of restricted common stock,
with an estimated stock value at date of acquisition of $17.848 million, based
on the acquired companies' ability to meet certain performance goals. The
aggregate purchase price, comprised of cash payments, issuance of promissory
notes, and issuance of Common Stock, has been allocated to the net assets of the
Company based upon their respective fair market values. The excess of the
purchase price over net assets acquired (goodwill) approximated $89.856 million
and is being amortized over periods not
exceeding 3015 years. As a result of the
nature of the assetsPro forma net income (loss) and liabilities of the businesses acquired, there were no
material identifiable intangible assets or liabilities.
The Company considers the following acquisitions as significant, and as
such, are discussed separately below:
In January 1997, Century acquired certain of the assets and business
of Midwest Indemnity Corporation ("Midwest"), in exchange for $3.3 million
in cash, 407,246 shares of restricted Common Stock and $1.8 million in
non-interest bearing notes payable in installments through December 31,
1998. Midwest markets surety bond products throughout the United States
through a system of approximately 100 independent agents and subagents. In
conjunction with the acquisition of Midwest's assets, the Century Surety
Group, which has developed the Company's surety bond business on a regional
basis over the past nine years, entered into a strategic partnership with
Gulf Insurance Company of New York (a Travelers/Aetna company). Under the
terms of the partnership, Century Surety Underwriters has been designated
Underwriting Services Administrator of Gulf's contract surety business.
In June 1997, Century acquired ZA Business Services, Inc. for
approximately $6.2 million in cash and 358,000 shares of restricted Common
Stock. ZA Business Services, Inc., located in Philadelphia, provides a wide
range of outsourced business services to a broad spectrum of industries as
well as litigation support to the legal profession. It has satellite
offices in Boston, Massachusetts; Milwaukee, Wisconsin and Harrisburg,
Pennsylvania and serves a client base in excess of 1,500 businesses and
individuals.
In September 1997, Century acquired Valuation Counselors Group, Inc.
for $6.75 million in cash and 558,026 shares of restricted Common Stock.
This valuation and appraisal service business has locations in Illinois,
California, Georgia, Massachusetts, Michigan, Missouri, New Jersey, New
York, Texas, Virginia, Washington and Wisconsin.
In October 1997, Century acquired Comprehensive, for 48,524 shares of
Common Stock, $1.75 million in cash and 154,242 shares of restricted Common
Stock. Comprehensive offers an extensive distribution networkearnings (loss) per share
for the full
rangeyears ended December 2002, 2001 and 2000 adjusted to eliminate
historical amortization of Century business services.
F-11goodwill and related tax effects, are as follows (in
thousands):
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)
F-12
41
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1997, Century acquired Robert D. O'Byrne & Associates,
Inc. and its affiliate, The Grant Nelson Group, Inc. for $5.5 millionCONTINUED
7. INCOME TAXES
A summary of income tax expense (benefit) included in cash, 654,300 shares of restricted Common Stock at closing. Robert D.
O'Byrne & Associates, Inc. and The Grant Nelson Group provide benefits
administration services.
The following data summarizes, on an unaudited pro forma basis, the combined results of continuing operations of the Company and the businesses
acquired for the two years ended December 31, 1997. The pro forma amounts give
effect to appropriate adjustments resulting from the combination, but are not
necessarily indicative of future resultsconsolidated
statements of operations or of what results would
have been for the combined companiesis as follows (in thousands):
UNAUDITED
----------------------
1997 1996
--------2002 2001 2000
------- ------- --------
Net revenues
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) -- pro forma............................. $188,793 $159,689
======== ========
Net income(3,002)
Cumulative effect of change in accounting principle..... (8,584) -- pro forma............................... $ 14,347 $ 10,084
======== ========
Earnings per common share -- pro forma
-- basic....................................... $ 0.35 $ 0.30
======== ========
-- diluted..................................... $ 0.27 $ 0.25
========(7,936)
------- ------- --------
$(1,506) $10,337 $(15,578)
======= ======= ========
3. EARNINGS PER SHARE
In February 1997,The provision (benefit) for income taxes attributable to earnings (loss)
from continuing operations differed from the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. The Company adopted this standard,amount obtained by applying the
federal statutory income tax rate to income (loss) from continuing operations
before income taxes, as required, for its
December 31, 1997 financial statements. For the years presented, the Company
presents both basic and diluted earnings per share. The following data shows the
amounts used in computing earnings per share and the effect on the weighted
average number of shares of dilutive potential common stock.follows (in thousands):
FOR THE YEAR ENDED 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------2002 2001 2000
------ ------- --------
BASIC EARNINGS PER SHARE
IncomeTax 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............... $12,765 36,940operations............................................. $8,124 $12,192 $ 0.35
------
Warrants........................................ - 11,721
Options......................................... - 243
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations plus assumed
conversions................................... $12,765 48,904 $ 0.261,514
====== ======= ========
Effective income tax rate................................ 51.8% n/a n/a
====== ======= ------========
FOR THE YEAR ENDED 1996
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE
Income from continuing operations............... $ 4,422 17,863 $ 0.25
------
Warrants........................................ -- 6,001
Options......................................... -- 168
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations plus assumed
conversions................................... $ 4,422 24,032 $ 0.18
======= =======
------
F-12F-13
42
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 1995
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE
Income from continuing operations............... $ 3,469 14,760 $ 0.24
-------
Warrants........................................ -- 2,196
------- -------
DILUTED EARNINGS PER SHARE
IncomeCONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities from continuing
operations plus assumed
conversions................................... $ 3,469 16,956 $ 0.20
======= ======= -------
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earning per common share for the years 1997 and 1996 were determined on
the assumption that the options and warrants were exercised at the beginning of
the period, or at time of issuance, if later. As a result, the Company's
reported earnings per share for 1996 and 1995 were restated. The effect of this
accounting change on previously reported earnings per share (EPS) data was as
follows:
As a result of the adoption of SFAS No. 128 in 1997, the Company's reported
earnings per share for 1996 and 1995 were restated. The effect of this
accounting change on previously reported earnings per share (EPS) was as
follows:
1996 1995
------ ------
Per share amount
Primary EPS as reported................................... $ 0.21 $ 0.20
Effect of SFAS No. 128.................................... 0.04 0.04
------ ------
Basic EPS as restated..................................... $ 0.25 $ 0.24
====== ======
Fully diluted EPS as reported............................. $ 0.16 $ 0.20
Effect of SFAS No. 128.................................... 0.02 --
------ ------
Diluted EPS as restated................................... $ 0.18 $ 0.20
====== ======
4. INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1997 were2002 and 2001, are as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------2002 2001
------- ------
U.S. Treasury securitiesDeferred Tax Assets:
Net operating loss carryforwards............................ $ 5,829 $6,460
Allowance for doubtful accounts............................. 928 4,330
Consolidation and obligationsintegration............................... 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 U.S. government
corporations and agencies........... $ 6,971 $ 47 $ 17 $ 7,001
Corporate securities................... 6,810 14 34 6,790
Foreign corporate bonds................ 317 16non-core business units......................... -- 333
Mortgage-backed securities............. 430 81,333
Asset basis differential.................................... 4,750 3,059
Other deferred tax liabilities.............................. -- 43828
------- ---- ----------
Total gross deferred tax liabilities...................... 5,242 7,360
------- Totals.............................. $14,528 $ 85 $ 51 $ 14,562------
Net deferred tax asset...................................... $14,147 $9,553
======= ==== ==== =============
F-13CBIZ had U.S. net operating loss (NOL) carryforwards of approximately $3.0
million and $5.5 million at December 31, 2002, 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. The
availability of all the NOL's is reported in the financial statement as deferred
tax assets, net of the applicable valuation allowance.
CBIZ has established valuation allowances for portions of the Canadian and
state NOL carryforwards, and state deferred taxes related to tax deductible
goodwill. The net change in the valuation allowance for the years ended December
31, 2002 and 2001 was an increase of $2.5 million and $1.5 million,
respectively. The net change in 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 million at
December 31, 2002 and 2001.
F-14
43
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)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 revolving credit
facility with a group of four banks. Under the facility, loans are charged an
interest rate consisting of a base rate or Eurodollar Libor plus an applicable
margin. Additionally, a commitment fee of 40 to 50 basis points is charged on
the unused portion of the facility. Borrowings and commitments by the banks
under the credit facility mature in September 2005. The amortized costcredit facility is
secured by all assets and estimatedcapital stock of CBIZ and its subsidiaries.
The bank agreement contains 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. Limitations are also placed on CBIZ's ability to acquire as well
as 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's
ability to create liens or other encumbrances, to make certain payments
(including dividends), investments, loans and guarantees and to sell or
otherwise dispose of a substantial portion of assets, or to merge or consolidate
with an unaffiliated entity. The agreement contains a provision that, in the
event of a defined change in control, the agreement may be terminated.
In the ordinary course of business, CBIZ provides letters of credit to
certain lessors in lieu of security deposits. Letters of credit under the credit
facility were $1.9 and $1.5 million as of December 31, 2002, and 2001,
respectively. Management does not believes it is practicable to estimate the
fair value of securitiesthese financial instruments, and does not expect any material
losses to result from these instruments because performance is not expected to
be required.
At December 31, 2002, based on the borrowing base calculation, CBIZ had
approximately $36.0 million of available for
salefunds under its credit facility.
Management believes that the carrying amount of bank debt recorded at December
31, 1997 were2002 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):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------YEARS ENDING DECEMBER 31,
- -------------------------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies...........2003........................................................ $ 7,681 $ 179 $ 17 $ 7,843
Corporate securities................... 16,817 226 7 17,036
Foreign corporate bonds................ 1,009 -- 32 977
Mortgage-backed securities............. 13,402 338 5 13,735
Other-assets backed securities......... 11,842 120 8 11,954
------- ------ ---- -------
50,751 863 69 51,545
Equity securities........................ 6,163 1,580 150 7,593
------- ------ ---- -------
Totals................................. $56,914 $2,443 $219 $ 59,138
======= ====== ==== =======22,318
2004........................................................ 19,480
2005........................................................ 15,316
2006........................................................ 13,863
2007........................................................ 12,610
Thereafter.................................................. 62,836
--------
$146,423
========
Expected maturities will differ from contractual maturities because the
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized cost and estimated fair value of fixed
maturities held to maturity at December 31, 1997, by contractual maturity, were
as follows (in thousands):
AMORTIZED ESTIMATED
COST FAIR VALUE
------- ----------
Due in one year or less.................................. $ 4,306 $ 4,291
Due after one year through five years.................... 9,361 9,384
Due after five years through ten years................... 355 356
Due after ten years...................................... 76 93
------- -------
14,098 14,124
Mortgage-backed securities............................... 430 438
------- -------
$14,528 $ 14,562
======= =======
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 1997, by contractual maturity, were as follows (in
thousands):
AMORTIZED ESTIMATED
COST FAIR VALUE
------- ----------
Due in one year or less.................................. $ 2,557 $ 2,552
Due after one year through five years.................... 15,971 16,180
Due after five years through ten years................... 6,237 6,353
Due after ten years...................................... 742 771
------- -------
25,507 25,856
Mortgage-backed securities............................... 13,402 13,735
Other asset-backed securities............................ 11,842 11,954
------- -------
$50,751 $ 51,545
======= =======
F-14F-15
44
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)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 amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1996 were as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 6,136 $ 28 $ 65 $ 6,099
Corporate securities..................... 8,850 18 96 8,772
Mortgage-backed securities............... 495 10 -- 505
------- ---- ---- -------
Totals................................. $15,481 $ 56 $161 $ 15,376
======= ==== ==== =======
The amortized cost and estimated fair value of securities available for
sale at December 31, 1996 were as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........... $16,067 $ 224 $ 93 $ 16,198
Corporate securities................... 10,962 87 66 10,983
Mortgage-backed securities............. 8,092 207 9 8,290
------- ------ ---- -------
35,121 518 168 35,471
Equity securities........................ 4,349 5,022 158 9,213
------- ------ ---- -------
Totals................................. $39,470 $5,540 $326 $ 44,684
======= ====== ==== =======
Net investment income was comprisedplaintiffs alleged that the named defendants
violated certain provisions of the followingSecurities 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 of 1999, CBIZ's Board of
Directors approved a plan to consolidate several operations in multi-office
markets and integrate certain back-office functions into a shared-services
center. The plan included the consolidation of approximately 60 locations, the
elimination of more than 200 positions, and the divestiture of four non-core
businesses. Pursuant to the plan, CBIZ recorded a consolidation and integration
pre-tax charge of $27.4 million in December 1999.
During 2000, CBIZ's Board of Directors approved a revision to the 1999 Plan
as a result of management changes and certain other strategic changes, and
extended the timing of certain office consolidations beyond one year
Accordingly, CBIZ reduced approximately $8.4 million of accruals originally
provided for in the plan related to several noncancellable lease and severance
obligations. 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 years ended
December 31 as follows (in thousands):
1997 1996 1995
------- ------- -------
Interest........................................ $ 4,519 $ 3,652 $ 3,455
Dividends....................................... 341 142 96
------- ------- -------
Total investment income....................... 4,860 3,794 3,551
Less: investment expense........................ (336) (230) (210)
------- ------- -------
Net investment income......................... $ 4,524 $ 3,564 $ 3,341
======= ======= =======
F-15consolidation of the Kansas City market which resulted in $1.7
million of cost related to two noncancellable lease obligations. In addition,
CBIZ continued its consolidations in the Philadelphia and
F-16
45
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Realized gainsCONTINUED
Columbia markets. During 2000 and losses on investments for2001, expenses were incurred related to
consolidations in the yearsLos Angeles, Chicago, Philadelphia, Phoenix, Cleveland,
Southern California, and Columbia, Maryland markets.
Consolidation and integration reserve balances as of December 31, 2002,
2001 and 2000, and activity during the twelve-month periods ended December 31,
are as follows (in thousands):
1997 1996 1995
------- ------- -------
Realized gains:
Available for sale:
Fixed maturities........................... $ 26 $ 117 $ 114
Equity securities.......................... 3,066 1,381 9
Other......................................... -- 125 73
------- ------- -------
Total realized gains....................... 3,092 1,623 196
------- ------- -------
Realized losses:
Available for sale:
Fixed maturities........................... 10 32 27
Equity securities.......................... 38 35 3
Other......................................... -- 27 --
------- ------- -------
Total realized losses...................... 48 94 30
------- ------- -------
Net realized gains on investments............. $ 3,044 $ 1,529 $ 166
======= ======= =======
The change in net unrealized appreciation (depreciation) of investments is
summarized as follows (in thousands):
1997 1996 1995
------- ------- -------
Available for sale:
Fixed maturities.............................. $ 444 $ (708) $ 2,147
Equity securities............................. (3,434) 1,437 3,583
------- ------- -------
$(2,990) $ 729 $ 5,730
======= ======= =======
The components of unrealized appreciation on securities available for sale
at December 312001 and 2000 were as follows (in thousands):
1997 1996 19951999 PLAN OTHER PLANS
--------------------------- -------------
LEASE SEVERANCE & LEASE
CONSOLIDATION BENEFITS CONSOLIDATION
------------- ----------- -------------
Reserve balance at December 31, 2000............ $ 2,843 $ 449 $ 2,385
Amounts charged to 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
======= ===== =======
- ---------------
(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 for years ended December 31,
2002, 2001 and 2000 were as follows ($ in thousands):
2002 2001 2000
--------- --------------------- -------------------------------
CORPORATE CORPORATE
OPERATING OPERATING G&A OPERATING G&A LOSS ON
EXPENSE EXPENSE EXPENSE EXPENSE EXPENSE SALE
--------- --------- --------- --------- --------- -------
Gross unrealized appreciation...................
CONSOLIDATION AND INTEGRATION
CHARGES NOT IN 1999 PLAN:
Severance expense................. $ 2,22443 $ 5,214296 $ 4,485
Deferred income tax............................. (618) (1,518) (1,219)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) --
------ ------ ----- ------- Net unrealized appreciation...................------- ----
Total consolidation and
integration charges............. $3,874 $1,957 $ 1,60678 $ 3,696428 $ 3,2661,564 $566
====== ====== ===== ======= ======= ===========
Fixed maturities held to maturity and certificates of deposit with a
carrying value of approximately $9,869,000 and $8,939,000 at December 31, 1997
and December 31, 1996, respectively, were on deposit with regulatory authorities
as required by law. At December 31, 1997 and 1996 all mortgage loans were
secured by properties in the states of California, Michigan and Ohio.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments and premiums
receivable: The carrying amounts reported in the consolidated and combined
balance sheets for these instruments are at cost, which approximates fair
value.
Investment securities: Fair values for investments in fixed maturities
are based on quoted market prices, where available. For fixed maturities
not actively traded, fair values are estimated using values obtained from
independent pricing services. The fair values for equity securities are
based on quoted market prices. Fair
F-16F-17
46
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
values for fixed maturities available for saleCONTINUED
11. EMPLOYEE BENEFITS
CBIZ has employee savings plans covering substantially all of its
employees. Participating employees may elect to contribute, on a tax-deferred
basis, a portion of their compensation, in accordance with Section 401(k) of the
Internal Revenue Code. Employer contributions made to the plans in 2002, 2001
and equity securities are
recognized2000, amounted to approximately $5.3 million, $5.0 million, and $5.6
million, respectively.
Two acquisitions made in 1998 and 1999 had employee stock option plans
(ESOP) which were subsequently frozen by CBIZ. 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 cost of the remaining unearned
ESOP shares and the fair value of those shares of approximately $1.8 million has
been charged to additional paid-in capital in the accompanying consolidated
and combined balance sheets.
Mortgage loans: The carrying amounts reported in the consolidated and
combined balance sheets are the aggregate unpaid balancestatements of the loans,
which approximates fair value.
5.stockholders' equity.
12. COMMON STOCK
The Company'sCBIZ's authorized common stock consists of 100,000,000250,000,000 shares of common
stock, par value $0.01 per share.share (Common Stock). The holders of the Company's Common
StockCBIZ's common
stock are entitled to one vote for each share held on all matters 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 entire Boarddirectors of Directors of the Company.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 the CompanyCBIZ out of funds legally available therefor.therefore. The Common
Stock is not entitled to any sinking fund, redemption or conversion provisions.
On liquidation, dissolution or winding up of the Company,CBIZ, the holders of Common Stock
are entitled to share ratably in the net assets of the CompanyCBIZ remaining after the
payment of any and all creditors. The outstanding shares of Common Stock are
duly authorized, validly issued, fully paid and nonassessable.non-assessable. The transfer
agent and registrar for the Common Stock is StarFifth Third Bank, N.A.
In June 1997, the Company completed theCBIZ completes registration of 5,372,805filings related to its Common Stock to register
shares of
common stock (the "Shares") of which up to 1,217,277 are issuable upon exercise
of outstanding warrants. The Shares were registered under the Securities Act of 1933 on behalf1933. To date, CBIZ has registered the
following shares of certain selling shareholdersCommon Stock for the following purposes: (i) approximately
six 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 ordershares
of our Common stock, debt securities, and warrants to permitpurchase common stock or
debt securities, of which $100 million remain available to be offered from time
to time to the public or
private sale or other public or private distributionunder our universal shelf registration statement; and
(iii) 15,000,000 shares of the Shares. Accordingly,
the Company will not receive any proceeds for these Shares.our Common Stock, all of which remain available to be
offered from time to time in connection with acquisitions under our acquisition
shelf registration statement.
In April 1997, the Company completed a private placement in which the
Company sold an aggregate of 616,611 units (the "Units") to qualified investors
at an aggregate purchase price of $9.00 per Unit. Each Unit consisted of one
shareFebruary 1999, CBIZ issued 1,800,000 restricted shares of common stock
and one warrant900,000 warrants to purchase one sharean outside party for a $25 million equity investment in
CBIZ. Fifty percent of the common stock at
an exercise price of $11.00 per share, exercisable foris subject to a three year period fromone-year lock-up
restriction, while the date of issuance. The Company realized net proceeds of approximately
$5,300,000.
In January 1997, the Company completed the registration of 32,126,076remaining common stock is subject to a two-year lock-up
restriction, and warrants to purchase shares of common stock (the "Shares")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's Board of whichDirectors authorized the implementation of
a share repurchase plan. The initial plan authorized the purchase of up to 17,925,888 are issuable
upon exerciseone
million shares of outstanding warrants. The Shares were registered underCBIZ's common stock over the Securities Act of 1933 on behalf of certain selling shareholders in order to
permit the public or private sale or other public or private distributionfirst six months of the Shares. Accordingly,plan. In
accordance with the Company will not receive any proceedsplan, CBIZ purchases shares though the open market and can
privately negotiate purchases and reserve them for these Shares.
In December 1996,possible use in the Company completed a private placement in which the
Company offered 3,251,888 units (the "Units") to qualified investors at an
aggregate purchase price of $9.00 per Unit. Each Unit consisted of one share of
common stock and one warrant to purchase one share of common stock at an
exercise price of $11.00 per share, exercisable for a three year period from the
date of issuance. The Company realized net proceeds of $27,737,000.
In October 1996, the Company issued 4,000,000 shares of the Company's
Common Stock and warrants to purchase an additional 12,000,000 shares of the
Company's Common Stock at exercise prices ranging from $2.625 to $3.875 per
share, expiring in two to four years, for an aggregate purchase price of
$10,500,000.
The Company granted warrantsfuture in
connection with certain acquisitions, made
during the year. Portionsemployee stock investment plan and other
general purposes. The repurchase program does not obligate CBIZ to acquire any
specific number of these warrants are restricted from being
transferred in accordance with various Lock-Up agreements between the former
shareholdersshares and may be suspended at any time. As of the acquired entities and the Company. The last restriction on
transferring these locked-up warrants expires in April 2000.
F-17December 31,
2002, CBIZ had repurchased 170,000 shares at a cost of $0.4 million.
F-18
47
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)CONTINUED
As part of the new bank credit agreement obtained in September 2002,
repurchases are subject to limitations based on net income. At December 31,
2002, CBIZ is in compliance with this covenant.
EMPLOYEE STOCK INVESTMENT PLAN
Effective June 1, 2001, CBIZ established the Employee Stock Investment Plan
which provides CBIZ employees with a method of purchasing shares of CBIZ's
common stock, $.01 par value per share. Participation in the plan is open to all
CBIZ employees whose payroll is processed by the designated CBIZ payroll
provider. CBIZ pays all opening and transaction charges related to the
enrollment and purchase of stock, other than those due upon the sale of the
shares.
Participants may also purchase shares of CBIZ Stock by making optional cash
investments in accordance with the provisions of the Plan. Shares of CBIZ Stock
purchased by participants in the Plan may be treasury or new issue stock, or at
CBIZ's option, CBIZ Stock purchased in the open market or negotiated
transactions. Treasury or new issue stock is purchased from CBIZ at the market
price on the applicable investment date. The price of CBIZ Stock purchased in
the open market or in negotiated transactions is the weighted average price at
which the shares are actually purchased.
WARRANTS
In connection with the spin off of the hazardous waste operations
(including CBIZ's predecessor company) to the stockholders 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
acquire shares of RESI's Common Stock equal to one fifth of the number of shares
available. At the Distribution date, RESI adjusted the per share exercise price
of the RESI warrants to reflect the effect of the distribution on the market
prices of RESI and its former parent's common stock. These warrants are
designated as stapled warrants and expireexpired at various dates through December
2000. In connection withPrior to the RESI Transaction,expiration of such warrants, the holders of these warrants
arewere able to exercise under the original terms of the warrants and will receive CompanyCBIZ
stock.
AtIn addition to warrants issued through the RESI Transaction, CBIZ also
issued warrants in connection with private placements completed in October 1996,
December 31,1996, and April 1997, there were outstanding unexercisedand granted warrants to acquire
22,379,387 sharesin connection with certain
acquisitions made during 1997. Portions of the Company's common stock of which 20,573,053 were
exercisable at prices ranging from $1.075 to $13.06. The remaining 1,806,334
warrants issued in connection
with 1997 acquisitions are restricted from transferbeing transferred in accordance with
various Lock-Uplock-up agreements discussed above. Atbetween 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, 1996 there were2002 ranged from
$25.00 to $30.00. Exercise prices for warrants outstanding unexercisedat December 31,
2001 ranged from $13.00 to $30.00. Exercise prices for warrants outstanding
at December 31, 2000 ranged from $3.875 to acquire 20,785,888 shares of the Company's common stock
at prices ranging from $1.075 to $11.00.$30.00.
STOCK OPTIONS
Under the 1997 Agents 1997 Stock Option Plan, a maximum of 1,200,000 options may
be awarded. The purpose of the Planplan is to provide performance-based compensation
to certain insurance agencies and individual agents who write quality surety
business for the Company'sCBIZ's insurance subsidiaries. The options vest only to the extent
the agents satisfy minimum premium commitments and certain loss ratio
performance criteria. The options terminateterminated in JulyJune 2002, or earlier under
certain conditions, including termination of the agency agreement.
Under the 2002 Employee Stock Option Plan (formerly the 1996 Employee Stock
Option Plans,Plan), a maximum of 1,000,00015,000,000 options may be awarded. The options
awarded are subject to a 20% incremental vesting schedule over a five-year
period commencing from the date of grant. The options are awarded at a price not
less than fair market value at the time of the award and expire six years from
the date of grant. Further, under the 1996 plan shareholders granted 250,000 options were granted to
non-employee directors. These options became exercisable immediately upon being
granted with a five yearsix-year expiration term from the date of grant.
As a result of the sale of RESI in July 1997, options awarded under the
1995 Employee Stock Option Plan became immediately vested and exercisable. These
options, which expire in July 1998, 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 on the grant date.
Prior to the RESI Transaction, certain options were granted to employees,
directors and affiliates of RESI's former parent company. When RESI was spun-off
in April 1995 (the "Distribution Date"), optionees received options to acquire
RESI Common Stock at the ratio of one RESI option for each five options under
the former parent's 1990 and 1991 Stock Option plans. The outstanding options at
the Distribution Date and the RESI options granted with respect thereto are
stapled and are only exercisable if exercised together. As a result of the sale
of RESI in July 1997, options under these plans became immediately vested and
exercisable.fully vested. These
options which expire in July 1998, 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 on the date of grant.
Information relating to the stock option plans is summarized below:below (in
thousands):
1997 1996
--------- --------2002 2001 2000
------ ------ ------
Outstanding at beginning of year......................... 317,072 190,200year............................ 9,652 7,858 5,394
Granted (a).............................................. 1,870,500 230,000................................................. 2,684 3,420 4,501
Exercised (b)............................................ (53,032) (101,960)............................................... (242) (34) --
Expired or canceled...................................... (74,000) (1,168)
--------- ---------canceled......................................... (1,142) (1,592) (2,037)
------ ------ ------
Outstanding at end of year (c)...................... 2,060,540 317,072
--------- ---------.............................. 10,952 9,652 7,858
====== ====== ======
Exercisable at end of year (d)...................... 567,640 22,320
========= =========.............................. 4,257 3,086 1,870
====== ====== ======
Available for future grant at the end of year............ 342,500 273,000
========= =========year............... 4,048 3,472 2,301
====== ====== ======
F-18F-20
48
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)CONTINUED
- ---------------
(a) Options were granted at average costsprices of $11.69$3.44, $1.54 and $2.31$2.98 in 19972002,
2001 and 1996,2000, respectively.
(b) Options were exercised at a prices ranging from $1.08$1.53 to $2.31$3.41 and averaging
$1.68$2.27 in 1997 and $1.08 to $3.60 and averaging $3.432002. Options were exercised at a price of $3.41 in 1996.2001. No
options were exercised in 2000.
(c) PricesExercise prices for options outstanding at December 31, 19972002 ranged from
$1.08 to $12.50$17.75 and averaged $10.49$4.81 with expiration dates ranging from July 1998March
2003 to October 2003. PricesNovember 2008. Exercise prices for options outstanding at December
31, 19962001 ranged from $1.08 to $4.10$17.75 and averaged $2.11$5.49 with expiration
dates ranging from May 19962002 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 2004.2002 to December 2006.
(d) OptionsExercise prices for options exercisable at December 31, 19972002, 2001, and 19962000
averaged $7.11$6.67, $8.50, and $2.18,$11.59, respectively.
Had the cost of stock option plans been determined based on the provisionfair value
of SFAS No. 123,options at the Company'sgrant date, CBIZ's net income (loss) and earnings (loss) per
share pro forma amounts would be as follows (in thousands)(amounts in thousands, except per
share data):
(UNAUDITED)
AS REPORTED PRO FORMA
------------------ --------------------------------------- ---------------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- ---------------- --------- --------- ---------
19972002
Net income............................ $11,530.. $11,530 $11,198 $11,198
======= ======= ======= =======loss................................ $ (76,848) $ (76,848) $ (80,365) $ (80,365)
========= ========= ========= =========
Net incomeloss per common share...........share...................... $ 0.31(0.81) $ 0.24(0.79) $ 0.30(0.85) $ 0.23
======= ======= ======= =======
1996(0.83)
========= ========= ========= =========
2001
Net income............................loss................................ $ 4,384(16,000) $ 4,384(16,000) $ 4,358(19,205) $ 4,358
======= ======= ======= =======(19,205)
========= ========= ========= =========
Net incomeloss per common share...........share...................... $ 0.25(0.17) $ 0.18(0.17) $ 0.24(0.20) $ 0.18
======= ======= ======= =======
1995(0.20)
========= ========= ========= =========
2000
Net income............................income.............................. $(126,076) $(126,076) $(129,112) $(129,112)
========= ========= ========= =========
Net loss per share...................... $ 3,469(1.33) $ 3,469(1.33) $ 3,468(1.36) $ 3,468
======= ======= ======= =======
Net income per common share........... $ 0.24 $ 0.20 $ 0.23 $ 0.20
======= ======= ======= =======(1.36)
========= ========= ========= =========
The above results may not be representative of the effects of SFAS No. 123
on net income
for future years.
The CompanyCBIZ applied the Black-Scholes option-pricing model to determine the fair
value of each option granted in 1997, 19962002, 2001 and 1995.2000. Below is a summary of the
assumptions used in the calculation:
1997 1996 19952002 2001 2000
----- ----- -----
Risk-free interest rate.............................. 6.01% 6.03% 6.21%
Dividend yield....................................... -- -- --rate..................................... 2.89% 4.39% 4.98%
Expected volatility.................................. 35.00% 35.00% 35.00%volatility......................................... 75.76% 76.38% 62.80%
Expected option life (in years)................................................... 3.75 3.75 3.75
13. EARNINGS PER SHARE
For the years presented, CBIZ presents both 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 options issued to key employees(amounts in 1996 were assumed to vest at a
rate of 100%thousands, except per share data). F-19Included
in potential dilutive
F-21
49
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
ActivityCONTINUED
shares are contingent shares, which represent shares issued 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 of the incremental shares 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 million
in the liabilityform of notes receivable in lieu of cash. In addition, CBIZ reduced $0.1
million of accruals for unpaid lossesnon-cancelable lease obligations due to changes in the
consolidation and loss expenses is summarized
as follows (in thousands)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):
1997 1996 1995
-------2002 2001 2000
------ ------- -------
Balance at January 1............................ $41,099 $37,002 $34,661
Less: Reinsurance recoverables, net........... 8,114 8,914 9,383
------- ------- -------
Net balance at January 1...................... 32,985 28,088 25,278
------- ------- -------
Incurred related to:
Current year.................................. 21,839 17,216 17,297
Prior years................................... (1,157) 408 (2,180)
------- ------- -------
Total incurred............................. 20,682 17,624 15,117
------- ------- -------
Paid related to:
Current year.................................. 2,468 3,684 5,963
Prior years................................... 8,800 9,043 6,344
------- ------- -------
Total paid................................. 11,268 12,727 12,307
------- ------- -------
Net balance at December 31...................... 42,399 32,985 28,088
Plus: reinsurance recoverables, net........... 8,256 8,114 8,914
------- ------- -------
Balance at December 31.......................... $50,655 $41,099 $37,002Interest.................................................. $2,521 $ 6,916 $12,156
====== ======= =======
Income taxes.............................................. $4,323 $(8,982) $ 2,540
====== ======= =======
In 199715. RELATED PARTIES
The following is a summary of certain agreements and 1995,transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the Company experienced lowerwhole, are no less
favorable than anticipated ultimate
lossesthose that would be available from unaffiliated parties. Based on
prior years due primarily to a reductionCBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
claims severityproperties owned indirectly by and leased from that
assumed in establishing the liability for losses and loss expenses payable. The
Company's environmental exposure from continuing operations relates primarily to
its coverage of remediation related risks, thus management believes the
Company's exposure to historic pollution situations is minimal. The Company's
non-insurance environmental exposure from discontinued operations is discussed
in Note 15.
7. REINSURANCEpersons employed by CBIZ. In the
ordinary course of business, the Company assumes and cedes
reinsurance with other insurers and reinsurers. These arrangements provide the
Company with a greater diversification of business and generally limit the
maximum net loss potential on large risks. Excess of loss reinsurance contracts
in effect through December 31, 1997, generally protect against individual
property and casualty losses over $200,000 and contract surety and miscellaneous
bond losses over $500,000. In addition to the excess of loss contract in effect
for contract surety business, a 50% quota share contract on the first $500,000
in losses is in effect. Workers compensation business is 75% ceded on a quota
share basis to reinsurers. The Company also maintains a statutory workers
compensation excess of loss reinsurance contract which provides statutorily
prescribed limits in excess of $200,000 for workers compensation business and
$800,000 excess of $200,000 for employers liability business. Asbestos
abatement, lead abatement, environmental consultants professional liability and
remedial action contractors business is 75% ceded on a quota share basis to
reinsurers. Catastrophe coverage is also maintained.
F-20aggregate, CBIZ paid approximately $0.8 million, $1.5 million
F-22
50
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)CONTINUED
and $1.5 million for the years ended 2002, 2001 and 2000, 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. (Akin, Gump.) Akin, Gump performed
legal work for CBIZ during 2002, 2001 and 2000 for which the firm received
$119,064, $68,540 and $116,000 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 impactmajority of reinsurance is as follows (in thousands):
1997 1996 1995
-------- -------- --------
Premiums written:
Direct...................................... $ 47,488 $ 42,420 $ 36,278
Assumed..................................... 12,263 468 1,417
Ceded....................................... (22,263) (11,739) (11,018)
------- ------- -------
Net...................................... $ 37,488 $ 31,149 $ 26,677
======= ======= =======
Premiums earned:
Direct...................................... $ 48,085 $ 39,311 $ 36,005
Assumed..................................... 7,647 576 1,507
Ceded....................................... (18,494) (12,236) (10,550)
------- ------- -------
Net...................................... $ 37,238 $ 27,651 $ 26,962
======= ======= =======
Losses and loss expense incurred:
Direct...................................... $ 20,135 $ 18,618 $ 16,342
Assumed..................................... 2,820 210 1,223
Ceded....................................... (2,273) (1,204) (2,448)
------- ------- -------
Net...................................... $ 20,682 $ 17,624 $ 15,117
======= ======= =======
The reinsurance payables were $7,828,000, $2,869,000the partners in the
independent CPA firms maintaining administrative service agreements with CBIZ
are CBIZ employees.
Robert A. O'Byrne, a Senior Vice President, was indebted to CBIZ in the
amount of $250,000 and $2,259,000$325,000 at December 31, 1997, 19962002 and 1995,2001, respectively.
Reinsurance recoverables were comprisedLikewise, CBIZ was indebted to the former shareholders of the following asRDOB/GNG of December 31
(in thousands):
1997 1996 1995
------- ------- -------
Recoverables on unpaid losses and loss
expenses...................................... $ 8,256 $ 8,114 $ 8,914
Receivables on ceding commissions and other..... 5,851 2,702 2,892
Receivables on paid losses and expenses......... 1,108 369 841
------- ------- -------
$15,215 $11,185 $12,647
======= ======= =======
The Company evaluates the financial condition of its reinsurers and
establishes a valuation allowance as reinsurance receivables are deemed
uncollectible. During 1997, the majority of ceded amounts were ceded to Republic
Western Insurance Company, Reliance Insurance Company, General Reinsurance
Corporation, Kemper Insurance Company and Gulf Insurance Company. The Company
monitors concentrations of risks arising from similar geographic regions or
activities to minimize its exposure to significant losses from catastrophic
events.
8. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs were as followswhich Mr.
O'Byrne is one, for $420,000 at December 31, (in thousands):
1997 1996 1995
------- ------- -------
Balance, beginning of year....................... $ 4,345 $ 3,428 $ 3,726
Policy acquisition costs deferred................ 9,803 8,616 7,476
Amortized to expense during the year............. (9,670) (7,699) (7,774)
------ ------ ------
Balance, end of year........................... $ 4,478 $ 4,345 $ 3,428
====== ====== ======
F-212002. Mr. O'Byrne also has an
interest in a partnership that receives commissions from CBIZ that are paid to
certain eligible benefits and insurance producers in accordance with a formal
program to provide benefits in the event of death, disability, retirement or
other termination. The note and the program were both in existence at the time
CBIZ acquired the former company, of which Mr. O'Byrne was an owner.
CBIZ has divested several operations during 2002 and 2001, in an effort to
rationalize the business and sharpen the focus on non-strategic businesses. In
accordance with this strategy, CBIZ has sold and may sell in the future
businesses to former employees or shareholders. Management believes these
transactions were priced at market rates, competitively bid, and entered into at
arm's length terms and conditions.
16. ACQUISITIONS
In October 2002, CBIZ acquired a benefits and insurance firm located in
Calverton, Maryland. The operating results of this firm have been included in
the accompanying consolidated financial statements since the date of the
acquisition. The aggregate purchase price of this acquisition was approximately
$4.1 million in cash. The excess of purchase price over fair value of the net
assets was allocated as follows: (i) goodwill of $2.0 million, (ii) purchased
client list of $2.6 million, and (iii) a lease obligation of $0.5 million
expiring in January 2006. The purchased client list is being amortized over a
ten-year period.
In May 2001, CBIZ acquired one Accounting, Tax and Advisory Services firm
which was accounted for under the purchase method of accounting. Accordingly,
the operating results of the acquired company have been included in the
accompanying consolidated financial statements since the date of the
acquisition. The aggregate purchase price 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. DIVESTITURES
During 2002, CBIZ sold, closed, or committed to sale the divestiture of
sixteen businesses. Five of these operations have been classified as
discontinued operations, in connection with the adoption of SFAS No. 144,
"Accounting for the Impairment of or 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 operation and were reported under gain (loss) on
divested operations from continuing operations. Of these eleven operations, CBIZ
completed the sale or closing of eight ATA operations,
F-23
51
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limitsCONTINUED
one Benefit and Insurance operation, and two National Practice operations for an
aggregate price of $7.2 million which included $4.0 million in notes
receivables. These divestitures resulted in a pretax gain of $0.9 million.
During fiscal 2001, CBIZ completed the paymentsale or closing of dividends byfifteen business
operations. In addition, CBIZ also recorded an additional charge related to the
planned divestiture or closing of five additional business units to be completed
in 2002. The aggregate price of these divestitures was $16.5 million which
included $14.0 million in cash, $2.4 million notes receivables and $0.1 million
in CBIZ stock. In addition CBIZ also retained a company$6.0 million contingent note.
These divestitures resulted in a pretax loss of $7.1 million.
During fiscal 2000, CBIZ completed the sale of three business operations
and its franchise operations for an aggregate price of $1.2 million. In
addition, CBIZ recorded an additional charge of $27.2 million related to its parent. The
maximum dividend that maythe
planned divestiture of two business operations with estimated proceeds of $15.5
million, which were scheduled to be paid without prior approvalcompleted 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 DirectorCommission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In light of Insurance is limitedthe 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
greaterissuance of the statutory net income of the preceding
calendar year or 10% of total statutory surplus as of the prior December 31,
which was $5.2 million at December 31, 1997.
The consolidated and combined financial statements have been preparedSAB 101, CBIZ recorded revenue in accordancea manner consistent with generally
accepted accounting principles ("GAAP"). The Company'sand 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 subsidiaries file annual financial statements with the Ohio Department
of Insurance and Utah Department of Insurance andcarriers from single-premium
bank-owned life insurance policies (BOLI) are preparedrecorded based on the
basisamounts due at the time of accounting practices prescribed by such regulatory authorities, which differsale, thereby eliminating a substantial
portion of commission receivable and resulted in an increase in deferred
tax assets. Prior to SAB 101, CBIZ accrued for commission revenue from
GAAP. Prescribed statutory accounting practices include a variety of
publicationsBOLI products based on the estimated commission to be received over the
life of the National Associationinsurance 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 Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
prescribed. All material transactionsmeeting 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 Company'sthird-party
payor, thereby eliminating unbilled receivables and resulted in an
increase in deferred tax assets. Prior to SAB 101, CBIZ recognized
revenue as services were provided to the client.
- Commission revenue at certain wholesale insurance subsidiaries arebusinesses 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.
CBIZ recognized $10.1 million of revenue in accordance with prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital ("RBC") formula. This model act requires every property and casualty
insurer to calculate its total adjusted capital and RBC requirement, and
provides for an insurance commissioner to intervene if the insurer experiences
financial difficulty. The model act became law in Ohio in March 1996, and in
Utah in April 1996, states where certain subsidiaries2000 which was included as a
component of the Company are
domiciled. The RBC formula includes components for asset risk, liability risk,
interest rate exposurecumulative effect of a change in accounting principle. During
2002 and other factors. The Company's insurance subsidiaries
exceeded all required RBC levels as2001, CBIZ recognized $1.0 million of December 31, 1997 and 1996.
CSC's statutory net income for the years ended December 31, 1997, 1996 and
1995 was approximately $5.2 million, $1.9 million and $3.7 million,
respectively, and the statutory capital and surplus as of December 31, 1997 and
1996 was approximately $31.5 million and $26.0 million, respectively.
10. INCOME TAXES
A summary of income tax expense (benefit) included in the Consolidated and
Combined Statements of Income is as follows (in thousands):
1997 1996 1995
------ ------ ------
Continuing operations:
Current:
Federal.................................. $6,523 $1,654 $2,121
State and local.......................... 715 13 --
----- ----- -----
7,238 1,667 2,121
Deferred:
Federal.................................. (897) (27) (699)
State and local.......................... (61) -- --
----- ----- -----
(958) (27) (699)
----- ----- -----
Total continuing operations................. 6,280 1,640 1,422
Discontinued operations....................... (621) 91 --
----- ----- -----
$5,659 $1,731 $1,422
===== ===== =====
F-22revenue.
F-24
52
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)CONTINUED
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The provisionfollowing is a summary of the unaudited quarterly results of operations
for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal statutory
income tax rate to income from continuing operations before income taxes, as
followsfiscal years 2002, 2001 (in thousands)thousands, except per share amounts):
1997 1996 1995
------ ------ ------2002
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Tax at statutory rate (34%)........................ $6,475 $2,061 $1,663
State taxes (net of federal benefit)............... 411 -- --
Change in valuation allowance...................... (875) (589) (169)
Tax exempt interest and dividends received
deduction........................................ (78) (33) (106)
Nondeductible goodwill............................. 383 -- --
Change in estimated liabilities.................... -- 196 --
Other, net......................................... (36) 5 34
------ ------ ------
Provision for income taxes
Revenues.............................. $142,204 $125,163 $116,090 $120,878
======== ======== ======== ========
Income (loss) from continuing
operations....................................... $6,280 $1,640 $1,422
====== ====== ======
Effectiveoperations.......................... $ 10,084 $ 1,954 $ (4,153) $ (329)
======== ======== ======== ========
Net income tax rate.......................... 33.0% 27.1% 29.1%
====== ====== ======(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
======== ======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996, are as follows (in thousands):
1997 1996
------- -------2001
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Deferred tax assets:
Loss expenses payable discounting.............................
Revenues.............................. $158,622 $129,451 $116,838 $111,981
======== ======== ======== ========
Income (loss) from continuing
operations.......................... $ 2,8529,252 $ 2,1762,246 $ (7,557) $(17,158)
======== ======== ======== ========
Net operating loss carryforwards.............................. 2,696 1,136
Unearned premiums not deductible.............................. 1,122 1,105
Deferred compensation......................................... 632income (loss)..................... $ 9,347 $ 1,964 $ (9,155) $(18,156)
======== ======== ======== ========
Earnings (loss) per share:
Basic --
Allowance for doubtful accounts............................... 388Continuing 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 --
Other deferred tax assets..................................... 97 151
------ ------
Total gross deferred tax assets............................ 7,787 4,568
Less: valuation allowance.................................. (2,135) (1,379)
------ ------Continuing operations............ $ 0.10 $ 0.02 $ (0.08) $ (0.18)
======== ======== ======== ========
Net deferred tax assets.................................... 5,652 3,189
------ ------
Deferred tax liabilities:
Change in accounting method................................... 3,199 --
Unrealized appreciation on investments........................ 618 1,518
Deferred policy acquisition costs............................. 1,523 1,477
Reinsurance recoverable....................................... 408 302
Other deferred tax liabilities................................ 235 219
------ ------
Total gross deferred tax liabilities....................... 5,983 3,516
------ ------
Net deferred tax liability, included in income taxes in the
consolidated and combined balance sheets...................(loss)................ $ 3310.10 $ 327
====== ======
Net deferred tax liability attributable to discontinued
operations, included in net assets held for disposal.......0.02 $ --(0.10) $ 1,340(0.19)
======== ======== ======== ========
Basic shares.......................... 94,825 94,903 94,919 94,754
======== ======== ======== ========
Diluted shares........................ 95,301 97,099 94,919 94,754
======== ======== ======== ========
The company had net operating loss ("NOL") carryforwards of approximately
$7,500,000 and $3,300,000 at December 31, 1997 and 1996, respectively, from the
separate return years of certain acquired entities. These losses are subject to
limitations regarding the offset of the company's future taxable income and will
begin to expire in 2007.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
determines a valuation allowance based on their analysis of amounts available in
the statutory carryback period, consideration of future deductible amounts, and
assessment of the
F-23F-25
53
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
separate company profitabilityCONTINUED
20. SEGMENT DISCLOSURES
CBIZ's business units have been aggregated into three reportable segments:
Accounting, Tax and Advisory Services, Benefits and Insurance and National
Practices. The business units have been aggregated based on the following
factors: similarity of certain acquired entities.the products and services; similarity of the regulatory
environment; the long-term performance of these units is affected by similar
economic conditions; and the business is managed along these segment lines,
which each report to a Practice Group Leader.
During the year 2002 the medical practice management unit under the segment
of National Practices exceeded the quantitative threshold of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," prompting
CBIZ to disclose this reporting unit separately.
Accounting, Tax and Advisory Services. The Company has
established valuation allowances for portionsAccounting, 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 acquired NOL carryforwardsbusiness
transactions such as mergers and acquisitions; quarterly and year-end payroll
tax reporting; corporate, partnership and fiduciary tax planning and return
preparation; outsourced chief financial officer services and other deferred tax assets.financial
staff services; financial investment analysis, succession, retirement, and
estate planning; and profitability, operational and efficiency enhancement
consulting to a number of specialized industries.
Benefits and Insurance Services. The net changeBenefits and Insurance practice group
offers services in the valuation allowance forfollowing areas: employee benefits, brokerage,
consulting, and administration, including the years ended December 31, 1997design, implementation and
1996 was a increaseadministration of $756,000qualified plans, such as 401(k) plans, profit-sharing plans,
defined benefit plans, and decreasemoney purchase plans; actuarial services; health and
welfare benefits consulting, including group health insurance plans; dental and
vision care programs; group life insurance programs; accidental death and
dismemberment and disability programs; COBRA administration and voluntary
insurance programs; health care and dependent care spending accounts; premium
reimbursement plans; communications services to inform and educate employees
about their benefit programs; executive benefits consulting on non-qualified
retirement plans and business continuation plans; specialty high-risk life
insurance; employee benefit worksite marketing; and wealth 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
$589,000, respectively.commercial, tangible, and intangible assets and financial securities; mergers
and acquisitions and capital advisory services, health care consulting,
government relations; process improvement; and technology consulting, including
strategic technology planning, project management, development, network design
and implementation and software selection and implementation.
Medical Practice Management. The portionCBIZ MMP subsidiary of the valuation allowance for deferred
tax assets for which subsequently recognized tax benefits will beNational
Practice group offers services in the following areas: billing and accounts
receivable management; coding and automated claims filing; comprehensive
delinquent claims follow up and collections; compliance plans to meet
governmental and other third party regulations; local office management; and
comprehensive statistical and operational reporting; financial reporting;
accounts payable, payroll, general ledger processing; design of physician
employment, stock and compensation arrangements; comprehensive budgeting,
forecasting, and financial analysis; 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; identifies and coordinates practice
merger and integration opportunities; and coordinates practice expansion
efforts.
Corporate and other charges represent costs at the corporate office that
are not allocated to reducethe business units, which include goodwill amortization and
impairment for all acquisitions accounted for under the purchase method of
acquired entities is $756,000 and $0 at December 31, 1997 and
1996, respectively.
11. NOTES PAYABLE, BANK DEBT AND CAPITALIZED LEASES
The Company maintains lines of credit with several banks. The Company's
primary line of credit is a $50,000,000 revolving credit facility with several
financial institutions, with Bank of America as Agent, and expires October 3,
2000. At December 31, 1997, approximately $8,200,000 was outstanding under such
credit facility. The Company's lines of credit are subject to normal banking
terms and conditions and the Company's subsidiaries capital stock are pledged as
collateral.
Notes Payable, Debt and Capitalized Leases
Notes payable, bank debt and capitalized leases, consists of the following
(in thousands):
DECEMBER 31
------------------
1997 1996
------- -------
Promissory notes payable to shareholders, with rates from
5.9% to 16.0%, due 1998 to 2012.......................... $ 8,523 $ 3,200
Other notes payable, with rates from 6.0% to 14.8%, due
1998 to 2005............................................. 3,311 --
Revolving credit facility, effective rate of 8.50%......... 8,200 --
Capitalized leases, various rates, payable in installments
through 2001............................................. 131 11
Other...................................................... 147 --
------- -------
$20,312 $ 3,211
======= =======
At December 31, 1997 aggregate maturities of notes payable, bank debt and
capitalized leases, were as follows (in thousands):
YEARS ENDING
DECEMBER 31,
- -----------------------------------------------------------
1998................................................ $16,997
1999................................................ 873
2000................................................ 395
2001................................................ 542
2002................................................ 270
Thereafter.......................................... 1,235
-------
$20,312
=======
Management believes that the carrying amounts of notes payable, bank debt
and capitalized leases recorded at December 31, 1997 were not impaired and
approximate fair values.
F-24accounting.
F-26
54
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain ofCONTINUED
Prior to 2001, CBIZ reported with four reportable segments: Accounting, Tax
and Advisory Services, Benefits and Insurance, Performance Consulting, and
Technology Services. CBIZ reorganized its premisesmanagement structure and equipment under various
operating lease agreements. Atchanged from
four reportable segments to the three described above. Segment information for
the year ended December 31, 1997, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are2000 has been reclassified in accordance with the
new segments.
CBIZ operates in the United States and Toronto, Canada and there is no one
customer that represents a significant portion of sales.
Segment information for the years ended December 31, 2002, 2001, and 2000
was as follows (in thousands):
YEARS ENDING
DECEMBER 31,
- -----------------------------------------------------------
1998................................................ $ 6,800
1999................................................ 6,007
2000................................................ 5,052
2001................................................ 3,955
2002................................................ 3,260
Thereafter.......................................... 10,6892002
-------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
------------------
ACCOUNTING MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
---------- ---------- -------- ------- $35,763
=======
Total rental expense incurred under operating leases was approximately
$3,588,000, $454,000 and $411,000 in 1997, 1996 and 1995, respectively.
Other
In the ordinary course of business, the Company is a defendant in various
lawsuits. In the opinion of management, the effects, if any, of such lawsuits
are not expected to be material to the Company's results of operations or
financial position.
The Company has profit sharing plans covering substantially all of its
employees. Participating employees may elect to contribute, on a tax deferred
basis, a portion of their compensation, in accordance with Section 401(k) of the
Internal Revenue Code. Employer contributions made to the plan for 1997, 1996
and 1995, amounted to approximately $674,000, $240,000 and $141,000,
respectively.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company recorded the acquisition of RESI as a non-cash transaction
consisting of a $4,000,000 promissory note and recapitalization of shareholders'
equity of $16,244,000. Additionally, during 1996, the Company acquired, in
exchange for 792,500 shares of its common stock, and other consideration, 100%
of SMR and ECI, which were also recorded as non-cash transactions.
Cash Paid During the Year for (in thousands):
1997 1996 1995
------ ------ --------------- --------
Interest...........................................
Revenue.............................. $209,911 $150,514 $66,156 $77,754 $ 348-- $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............ $ 6023,104 $ 216
====== ====== ======
Income Taxes....................................... $5,753 $1,29023,836 $ 128
====== ====== ======9,678 $(2,211) $(38,727) $ 15,680
======== ======== ======= ======= ======== ========
14. RELATED PARTIES
The Company's Executive Vice President ("EVP"), who is also a director, and
one of the Company's Senior Vice Presidents were each a one-third owner of SMR.
In addition, in connection with the SMR acquisition, the EVP received 195,600
shares of common stock and 293,400 warrants to purchase additional shares of
common stock at an exercise price of $10.375. The office building utilized by
SMR Business Services Co. is leased under a ten-year lease from a partnership in
which the EVP and one of the Senior Vice President's are each indirectly, a
one-third owner.
F-25F-27
55
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)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, 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 Company's investment portfolios include loans to business organizations
associated with a relativeoperations are reported as discontinued
operations and the net assets and liabilities and results of a shareholder of the Company, which aggregate
$1,200,000. These loans provide for interest payments of 9% per annum only until
maturity, which range from December 31, 1998 through April 30, 1999.
The EVP and one of the Senior Vice President'soperations are
partners (among others)
in SMR & Co. CPA, which buys services from a subsidiary of the Company.
Collectively, these two officers hold a 9% interestreported separately in the partnership.
The Company has a $225,000, non-interest bearing note receivable from Sofia
Management Ltd., a 5% shareholder of the Company.
15. DIVESTITURES
In February 1997, the Company signed a letter of intent to sell the
Company's Environmental Services business. In July 1997, the Company sold the
majority of its environmental services business, and in September 1997, sold its
remaining environmental operations. Taken together, these transactions for cash
and notes resulted in a net loss of $572,000. The Company's contingent liability
is limited to $1.5 million in connection with such divestitures. Management does
not believe the Company will experience a loss in connection with such
contingencies.
In December 1997, the Company sold Environmental and Commercial Insurance
Agency, Inc. and Environmental and Commercial Insurance Agency of LA, Inc. for
cash consideration, resulting in a gain of approximately $171,000.
16. SUBSEQUENT EVENTS
On January 2, 1998, the Company completed the acquisition of Bass
Consultants, Inc., located in Houston, Texas, for 626,966 shares of common
stock. Bass Consultants, Inc. provides benefits administration services.
On January 6, 1998, the Company completed the acquisition of Rootberg
Business Services, Inc., located in in Chicago, Illinois, for $5,100,000 in cash
and 482,353 shares of restricted stock. Rootberg Business Services, Inc.
provides accounting and business services.
On January 15, 1998, the Company announced it had entered into agreements
to acquire three accounting firms. The firms involved are (a) Braunsdorf,
Carlson & Clinkinbeard, CPA's P.A. and Bushman & Associates, CPA's P.A. ("The
BCC Group"), of Topeka, Kansas, (b) Kaufman Davis, Inc., of Bethesda, Maryland,
and (c) Seitz, Kate, Medve, Inc., of Cleveland, Ohio. On January 30, 1998, the
Company completed the acquisition of the BCC Group and Seitz, Kate, Medve, Inc.
The BCC Group serves client niches in construction, low-income housing,
nonprofit and government, credit unions, hospitality, retirement homes, and
litigation support. Kaufman Davis, Inc. provides accounting and management
consulting services. Seitz, Kate, Medve, Inc. provides financial, tax, estate
and investment planning services. The combined cost of these transactions is a
maximum of $4,600,000 in cash and a maximum of $6,200,000 of restricted Company
common stock.
On February 6, 1998, in connection with a private placement of 5,000,000 of
the Company's Common Stock consisting of 3,800,000 newly-issued shares and
1,200,000 shares of outstanding Common Stock offered by certain selling
shareholders, the Company received a subscription for 500,000 shares from an
affiliate of the Company's Chairman, President and Chief Executive Officer. The
purchase of these shares by one of the Company's largest shareholders, Westbury
(Bermuda) Ltd. is conditioned, among other things, to shareholder approval at
the Annual Meeting scheduled for April 30, 1998.
F-26consolidated
F-28
56
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA
QuarterlyCONTINUED
financial data are summarizedstatements. Four of these operations were either sold or closed as follows (amounts in thousands,
except per share amounts)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. 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):
1997 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------- --------- -------- ------------- ------------2002 2001
------ -------
Revenues..................................... $16,296Accounts receivable, net.................................... $5,499 $ 21,088 $27,4748,367
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 $ 43,372
======= ======= ======= =======
Income from continuing operations............ $ 2,109 $ 2,233 $ 3,415 $ 5,008
Income (loss) from discontinued operations... (534) (179) 50 (572)
------- ------- ------- -------
Net income................................. $ 1,575 $ 2,054 $ 3,465 $ 4,436
======= ======= ======= =======
Earnings per common share:
Basic --
Continuing operations................... $ 0.06 $ 0.06 $ 0.09 $ 0.13
Discontinued operations................. (0.01) -- -- (0.02)
------- ------- ------- -------
Net income per share....................... $ 0.05 0.06 0.09 0.11
======= ======= ======= =======
Earnings per common share:
Diluted --
Continuing operations................... $ 0.04 $ 0.05 $ 0.07 $ 0.10
Discontinued operations................. (0.01) (0.01) -- (0.01)
------- ------- ------- -------
Net income per share....................... $ 0.03 $ 0.04 $ 0.07 $ 0.09
======= ======= ======= =======
Weighted average common shares............... 34,507 35,817 37,927 39,293
======= ======= ======= =======
Weighted average common shares and diluted
potential common shares:................... 48,059 47,042 48,992 50,494
======= ======= =======4,596
====== =======
1996 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------- --------- -------- ------------- ------------
Revenues..................................... $ 9,320 $ 7,346 $ 9,389 $ 9,714
======= ======= ======= =======
Income from continuing operations............ $ 655 $ 771 $ 839 $ 2,157
Loss from discontinued operations............ -- -- -- (38)
------- ------- ------- -------
Net income................................. $ 655 $ 771 $ 839 $ 2,119
======= ======= ======= =======
Earnings per common share:
Basic --
Continuing operations................... $ .04 $ .05 $ .06 $ .09
Discontinued operations................. -- -- -- --
------- ------- ------- -------
Net income per share....................... $ .04 $ .05 $ .06 $ .09
======= ======= ======= =======
Earnings per common share:
Diluted --
Continuing operations................... $ .04 $ .05 $ .03 $ .06
Discontinued operations................. -- -- -- --
------- ------- ------- -------
Net income per share....................... $ .04 $ .05 $ .03 $ .06
======= ======= ======= =======
Weighted average common shares............... 14,760 14,760 14,760 23,850
======= ======= ======= =======
Weighted average common shares and diluted
potential common shares:................... 16,956 16,956 28,100 33,703
======= ======= ======= =======
F-27In October 2000, CBIZ completed the sale of its risk-bearing specialty
insurance segment (which included Century Surety Company, Evergreen National
Indemnity Company, and Continental Heritage Insurance Company) for $28 million
in cash, resulting in a loss on disposal of discontinued business, net of tax,
of $5.7 million for the year ended December 31, 2000.
22. SUBSEQUENT EVENTS
In January 2003, 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
57
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
SCHEDULE III -- SUMMARY OF INVESTMENT -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D
- -------------------------------------------------- -------- -------- -------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- -------------------------------------------------- -------- -------- -------------
Fixed maturities--held in maturity:
Bonds:
U.S. government and government agencies and
authorities.................................. $ 6,971 $ 7,001 $ 6,971
Corporate securities............................ 6,810 6,790 6,810
Foreign corporate bonds......................... 317 333 317
Mortgage-backed securities...................... 430 438 430
Fixed maturities--available for sale:
Bonds:
U.S. government and government agencies and
authorities.................................. 7,681 7,843 7,843
Corporate securities............................ 16,817 17,036 17,036
Foreign corporate bonds......................... 1,009 977 977
Mortgage-backed securities...................... 13,402 13,735 13,735
Other-assets backed securities.................. 11,842 11,954 11,954
------ ------ ------
Total fixed maturities..................... 65,279 66,107 66,073
------ ------ ------
Equity securities:
Common Stock:
Public utilities................................ 311 364 364
Banks, trust and insurance Companies............ 46 82 82
Industrial, miscellaneous and all other......... 1,265 2,577 2,577
Nonredeemable preferred stocks.................... 4,541 4,570 4,570
------ ------ ------
Total equity securities.................... 6,163 7,593 7,593
------ ------ ------
Mortgage loans on real estate..................... 1,839 1,839
Short-term investments............................ 4,215 4,215
------ ------
Total investments.......................... $77,496 $79,720
====== ======
See accompanying Independent Auditors' Report.
F-28
58
CENTURY BUSINESS SERVICES, INC.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATIONVALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 19962002, 2001, AND 1995
(IN THOUSANDS)2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
COLUMN F
- --------------------------------- -------- ------------------------------------- ------------ -------------------------------------- ----------- ----------
ADDITIONS
--------------------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING OF COST & TO OTHER ACQUISITIONS/ RECOVERIES/ END OF
PERIOD EXPENSE ACCOUNTS DIVESTITURES DEDUCTIONS PERIOD
------------ ---------- --------
FUTURE POLICY
BENEFITS, OTHER
DEFERRED LOSSES POLICY
POLICY CLAIM AND CLAIMS AND
ACQUISITION LOSSES UNEARNED BENEFITS PREMIUM
SEGMENT COST EXPENSE PREMIUMS PAYABLES REVENUE
- --------------------------------- ----------------- ------------- ----------------------- ---------- --------
Year Ended:
December
YEAR ENDED DECEMBER 31,
1997..............2002
Allowance deducted from
assets to which they
apply:
Allowance for doubtful
accounts.............. $12,720 $ 4,478 $50,6557,201 $ 22,656 N/A $37,238
December(523) $(167) $(10,396) $ 8,835
======= ======= ======= ===== ======== =======
YEAR ENDED DECEMBER 31,
1996.............. 4,345 41,009 18,637 N/A 27,651
December2001
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,
1995.............. 3,428 37,002 15,636 N/A 26,9622000
Allowance deducted from
assets to which they
apply:
Allowance for doubtful
accounts.............. $15,727 $21,887 $ 948 -- $(19,662) $18,900
======= ======= ======= ===== ======== =======
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------- ------------- ------------ ---------- --------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER DIRECT
INVESTMENT LOSSES AND ACQUISITION OPERATING PREMIUMS
INCOME LOSS EXPENSE COSTS EXPENSES WRITTEN
-------- ------------- ------------ ---------- --------
Year Ended:
December 31, 1997.............. $ 4,524 $20,682 $ 9,670 $ 2,677 $47,488
December 31, 1996.............. 3,564 17,624 7,699 2,951 42,420
December 31, 1995.............. 3,341 15,117 7,774 3,157 36,278
See accompanying Independent Auditors' Report.
F-29F-30
59
CENTURY BUSINESS SERVICES, INC.
SCHEDULE IV -- REINSURANCE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- -------- -------- -------- --------
PERCENTAGE
ASSUMED OF
CEDED TO FROM AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- -------- -------- -------- --------
Year ended December 31, 1997
Property -- Casualty Earned
Premiums........................... $48,085 $18,494 $ 7,647 $37,238 20.54%
Year ended December 31, 1996
Property -- Casualty Earned
Premiums........................... $39,311 $12,236 $ 576 $27,651 2.08%
Year ended December 31, 1995
Property -- Casualty Earned
Premiums........................... $36,005 $10,550 $ 1,507 $26,962 5.59%
See accompanying Independent Auditors' Report.
F-30CERTIFICATION 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
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Ware H. Grove
Chief Financial Officer
Date: March 24, 2003
F-32