1UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31, 1997 OR2004 or
[ ] TRANSITION]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .For 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
- --------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OHIO 44125
- ---------------------------------------- ----------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S
DELAWARE 22-2769024
- -------------------------------------------- --------------------------------------------
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
6050 OAK TREE BOULEVARD, SOUTH
SUITE 500
CLEVELAND, OHIO 44131
- -------------------------------------------- --------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (216) 447-9000CODE) 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$0.01
(TITLE OF CLASS)
Indicate by check mark whether the Registrantregistrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the precedingproceeding 12 months, (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] 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'sregistrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 isregistrant was approximately $371,104,081$339.1 million as of February 13, 1998.June 30, 2004. The number
of outstanding shares of the Registrant'sregistrant's common stock is 47,406,738 shares75,873,931 as of
February 13, 1998.28, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative to
the 19982005 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, 19972004
TABLE OF CONTENTS
PAGE
----
PART I
Items 1
and 2. Business and Properties................................................Properties..................................... 3
Item 3. Legal Proceedings...................................................... 12Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................... 12Holders......... 15
PART II
Item 5. Market for Registrant's Common Stock andEquity, Related Stockholder
Matters... 17Matters and Issuer Purchases of Equity Securities........... 16
Item 6. Selected Financial Data................................................ 17Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................Operations................................... 19
Item 7A. Quantitative and Qualitative InformationDisclosures About Market
Risk............. 26Risk........................................................ 37
Item 8. Financial Statements and Supplementary Data............................ 26Data................. 37
Item 9. Changes in and Disagreements withWith Accountants on Accounting
and Financial Disclosure................................................. 26Disclosure.................................... 37
Item 9A. Controls and Procedures..................................... 37
Item 9B. Other Information........................................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 26Registrant.......... 39
Item 11. Executive Compensation................................................. 26Compensation...................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management......... 26Management.................................................. 43
Item 13. Certain Relationships and Related Transactions......................... 27Transactions.............. 43
Item 14. Principal Accounting Fees and Services...................... 44
PART IV
Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 27Schedules..................... 44
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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 outsourcedprofessional business services including specialty
insurance services, to smallbusinesses of various
sizes, as well as individuals, governmental entities and medium sized commercialnot-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;
- 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 services69 reporting business units with approximately 250 franchiseemore than
140 offices located in 40
states. As34 states, the District of December 31, 1997,Columbia, 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 Practices group, is the
Company's medical practice management business unit which has 76 offices.
CBIZ's goal is to be the leading provider of business services within its
target markets by providing clients employ over
one million employees, including 240,000 employed by clients of the
Comprehensive franchisee network.
In October 1996, Century completed two acquisitions (the "Merger
Transactions") pursuant to which it acquired, throughwith 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 widebroad range of outsourced businesshigh-quality products
and services including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and 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 outsourced business services
industry from its existing specialty insurance platform.
During 1997, the Company acquired the businesses of 39 companies
representing over $134 million in annualized revenues at the time 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 resulted
in significant increases 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 of 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 million 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 bywhile expanding its recently acquired outsourced business services and
specialty insurance operationslocally through internal growth, acquisitions and
additional
acquisitionscross-serving. CBIZ built its professional services business through acquiring
accounting, benefits, valuation and other service firms throughout the United
States, and has been established as a national provider over the last several
years. During 2004, CBIZ acquired four businesses that enhance our technology,
benefits and insurance and accounting and tax services in such industries. See "-- Business Strategy."
Century was formedour existing markets.
Our intention is to continue to selectively acquire businesses with
complementary services in target markets.
Formed as a Delaware corporation in 1987 under the name Stout Associates,
Inc. ("Stout") and primarily supplied hazardous waste services. In
1992, the CompanyCBIZ 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 beganwe changed our trading under the symbol to "IASI" in anticipation of theour
merger with Century Surety Company and Commercial Surety Agency, Inc., which ultimately
resulted in a name change of its 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 isCBIZ'S PRINCIPAL EXECUTIVE OFFICE IS LOCATED AT 6050 OAK TREE BOULEVARD, SOUTH,
SUITE 500, CLEVELAND, OHIO 44131, AND OUR TELEPHONE NUMBER IS (216) 447-9000.
In
March 1998, the Company's principal executive office will be relocated to 6480
Rockside Woods Blvd., South, Suite 330, Cleveland, Ohio 44131. Its telephone
number will remain the same.
BUSINESS STRATEGY
Century'sCBIZ's business strategy is to grow aggressively by expanding its
current operations in the outsourcedprofessional business services
and specialty insurance
areas, having discontinued and disposedindustry by:
- offering a wide array of its operations in the environmental
service area. The Company plansinfrastructure support services;
- cross-serving these services to implement its business strategy through
internal growth and by acquiring and integratingour existing businesses that
provide outsourcedcustomer base;
- attracting new customers with our diverse business services or specialtyofferings;
- leveraging our practice area expertise across all our businesses; and
- developing our core service offerings in target markets through selective
acquisitions.
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Providing a range of business services to a client results in advantages
for both the client and for CBIZ. Working with one provider for several tasks
saves the client the time of having to coordinate with multiple vendors. For
example, the employee data used to process payroll can also be used by a CBIZ
health and welfare insurance services.agent and benefits consultant to provide
appropriate benefits package to a client's employee base. In addition, the
relationship our accounting and tax advisors have with their clients allows us
to identify financial planning, wealth management, and other business
opportunities. The Company generally targetsability to combine several services and offer them through
one trusted provider distinguishes CBIZ from other 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-selling amongcross-serving to CBIZ's clients;
- can integrate quickly with existing CBIZ operations;
- have strong and energetic leadership;
- are accretive to earnings; and
- help enhance the Company's
subsidiaries.core CBIZ service offering in a geographical market.
In accordance with our strategy to deliver services to clients locally and
to promote cross-serving between our various service groups, CBIZ consolidates
office locations wherever practical. Since 2000, CBIZ consolidated offices in
Atlanta, Boca Raton, Chicago, Cleveland, Columbus, Dallas, Denver, Kansas City,
Los Angeles, Minneapolis, Orlando, Philadelphia, Salt Lake City, San Jose and
St. Louis. CBIZ will continue to combine offices, with consolidations planned in
the Denver, Atlanta, and San Diego markets in 2005. 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.
OUTSOURCEDconsolidations.
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: accounting
systems, advisory and tax; employee benefits design and administration; human
resources; information technology systems; payroll; valuation; and workers'
compensation. These services are provided 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. 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 clients of the
Comprehensive franchisee network.
The Company's clients typically have fewer than 500 employees, and prefer
to focus their resources on operational competencies while allowing Century to
provide non-core administrative functions. In many instances, outsourcing
administrative functions allows clients to enhance productivity, reduce costs,
and improve service, quality and efficiency. Depending on a client's size and
capabilities, it may choose to utilize all or a
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portion of the Company's broad array of services, which it typically accesses
through a single Company 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 providesplanning and consulting for
individuals, corporations, partnerships, estates and trusts; strategic planning;
consulting; record-keeping and financial statement preparation; tax projectionsplanning
based on financial and investment alternatives and assists in
appropriatealternatives; tax structuring of business
transactions such as mergers and acquisitions. The Company offersacquisitions; quarterly and year-end payroll
tax reporting,
corporate, partnershipreporting; outsourced chief financial officer services 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 offersother financial
planning services to individuals, includingstaffing services; financial investment counseling, personal
financial statements, mortgage and investment analysis,analysis; succession, planning,
retirement, planning and
estate planning. In addition, the Company offersplanning; cash flow management; profitability, operational and efficiency
enhancement consulting to a number of specialized industries.
EMPLOYEE BENEFITS DESIGN AND ADMINISTRATION.industries; litigation support
services; internal audit services and Sarbanes-Oxley consulting and compliance
services.
Restrictions imposed by independence requirements and state accountancy
laws and regulations preclude CBIZ from rendering audit and attest services
(other than internal audit services). As such, CBIZ and its subsidiaries
maintain joint-referral relationships and administrative service agreements
(ASAs) with independent licensed Certified Public Accounting (CPA) firms under
which audit and attest services may be provided to CBIZ's clients by such CPA
firms. These firms are owned by licensed CPAs who are employed by CBIZ
subsidiaries.
Under these ASAs, CBIZ provides a range of services to the CPA firms,
including (but not limited to): administrative functions such as office,
bookkeeping, and accounting; preparing marketing and promotion materials;
providing office space, computer equipment, and systems support; and leasing
administrative and professional staff. Services are performed in exchange for a
fee. Fees earned by CBIZ under the ASAs are recorded as revenue in the
accompanying consolidated statements of operations and amounted to approximately
$46.3 million and $39.8 million for the years ended December 31, 2004 and 2003,
respectively, a majority of which is related to services rendered to
privately-held clients. In the event that accounts receivable and unbilled
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work in process become uncollectible by the CPA firms, the service fee due to
CBIZ is reduced on a pro-rata basis.
With respect to CPA firm clients that are required to file audited
financial statements with the SEC, the SEC staff views CBIZ and the CPA firms
with which we have contractual relationships as a single entity in applying
independence rules established by the accountancy regulators and the SEC.
Accordingly, we do not hold any financial interest in an SEC-reporting attest
client of an associated CPA firm, enter into any business relationship with an
SEC-reporting attest client that the CPA firm performing an audit could not
maintain, or sell any non-audit services to an SEC-reporting attest client that
the CPA firm performing an audit could not maintain, under the auditor
independence limitations set out in the Sarbanes-Oxley Act of 2002 and other
professional accountancy independence standards. Applicable professional
standards generally permit the ATA practice group to provide additional services
to privately-held companies, in addition to those services which may be provided
to SEC-reporting attest clients of an associated CPA firm. CBIZ and the CPA
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. Given the pre-existing limits
set by CBIZ on its relationships with SEC-reporting attest clients of associated
CPA firms, and the limited number and size of such clients, the imposition of
Sarbanes-Oxley Act independence limitations did not and is not expected to
materially affect CBIZ revenues.
The CompanyCPA firms with which CBIZ maintains ASAs operate as limited liability
corporations, limited liability partnerships or professional corporations. The
firms are separate legal entities with separate governing bodies and officers.
Neither the existence of the ASAs nor the providing of services thereunder is
intended to constitute control of the CPA firms by CBIZ. CBIZ and the CPA firms
maintain their own respective liability and risk of loss in connection with
performance of its respective services. Attest services can not be performed by
any individual or entity which is not licensed to do so. CBIZ can not perform
audits or reviews, does not contract to perform them and does not provide audit
or review reports. Given this legal prohibition and course of conduct, CBIZ does
not believe it is likely that we would bear the risk of litigious losses related
to attest services provided by the CPA firms.
At December 31, 2004, CBIZ maintained administrative service agreements
with 16 CPA firms, which has decreased from 41 during 2002. Most of the members
and/or shareholders of the CPA firms are also CBIZ employees, and CBIZ renders
services to the CPA firms as an independent contractor. The number of firms with
which CBIZ maintains administrative service agreements decreased when a majority
of the partners of CPA firms with whom we previously maintained ASAs joined
Mayer Hoffman McCann, P.C. (MHM P.C.) an independent national CPA firm
headquartered in Kansas City, Kansas. MHM P.C. has 178 shareholders, a vast
majority of which are also employees of CBIZ. MHM maintains a six member Board
of Directors. There are no board members of MHM P.C. who hold senior officer
positions at CBIZ. CBIZ's association with MHM P.C. offers comprehensiveclients 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 we maintain ASAs.
Although the ASAs do not constitute control, CBIZ is one of the
beneficiaries of the agreements and may bear certain economic risks. As such,
the CPA firms with which CBIZ maintains administrative service agreements
qualify as variable interest entities under FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". See further discussion in Note 1
of the accompanying consolidated financial statements.
CBIZ's ATA practice is divided into four regions, representing the East,
Midwest, Great Lakes, and West regions of the United States. 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 $209.1 million of revenue,
representing approximately 40.2% of CBIZ's annual revenue in 2004.
Benefits & Insurance Services. The business units that comprise CBIZ's
Benefits & Insurance group are organized by the following two groups: Retail and
National Services. The Retail group is divided into three geographical regions
representing the East, Central, and West regions of the United States. Each of
the retail operations provides a broad range of primarily commercial employee
benefitsbenefit and property and casualty insurance
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services within their geographic area. Specific services include: consulting services. These includeand
brokerage of group health and welfare plans (group health, dental, vision, life
and disability programs); the design, implementation and administration of
401(k)qualified retirement plans, profit sharingsuch as profit-sharing plans (including 401-k
plans), defined benefit plans, and money purchase plans andplans; actuarial services. The Company also
assists in the choice ofservices for
health and welfare benefits such as group health
insurance plans dental and vision care programs, group life insurance programs,
accidental deathqualified retirement plans; COBRA and dismemberment or disability programs,Section 125
plan administration and voluntary insurance programs health care and dependent care spending accounts and premium
reimbursement plans. In addition, the Company offersfor employees;
communications services to
inform and educate employees about their benefit programs. The Company also
offersprograms;
executive benefits consulting on non-qualified retirement plansplans; and business
continuation plans. Moreover, oneIn addition, the Benefits & Insurance Services group
provides some personal lines brokerage for property and casualty and individual
life and health insurance.
The National Services group is comprised of the Company's subsidiaries offers
Registered Investment Advisory Services,several specialty operations
that provide unique services on a national scale. The services include:
specialty high-risk life insurance and clinical underwriting; employee benefit
worksite marketing; wholesale insurance brokerage services; bank-owned executive
life insurance; and wealth management services, including Investment Policy Statements
(IPS),registered investment
advisory services, investment policy statements; mutual fund selection based on IPSselections; and
ongoing mutual fund monitoring.
HUMAN RESOURCES SERVICES. The Company offers executive searchCBIZ's Benefits and placement, outplacement, organizationalInsurance group also provides an on-line enrollment
service, CBIZSolutions that in concert with our payroll services, enables
employers 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
expectsemployees of a client to provide additional services, including pre-employment screening,
specialized systemsaccess information such as applicant skill evaluations, customer contact
monitoring,health and
welfare benefits, retirement fund balances and payroll information; enroll for
benefit plans; and access certain human resource documents like employee
assessmenthandbooks and selection.policies.
CBIZ's Benefits and Insurance Services group maintains relationships with
some but not all insurance carriers. Some of these carriers have compensation
arrangements with CBIZ whereby some portion of payments due may be contingent
upon meeting certain performance goals. These compensation arrangements are
provided to CBIZ as a result of our performance and expertise by which products
and services are provided to the client and may result in enhancing CBIZ's
ability to access certain insurance markets and services on behalf of CBIZ
clients. The Company can assistaggregate of these payments received in 2004 was less than 2.0% of
consolidated CBIZ revenues.
During 2004, state insurance regulators have conducted inquiries to clarify
the nature of compensation arrangements within the insurance brokerage industry.
To date, CBIZ, along with other major insurance brokerage operations, has
received several requests for information regarding our compensation
arrangements related to these practices from such authorities. CBIZ has
discussed the implementationnature of programs to strengthen both the financialthese inquires and human
resources sidescompensation arrangements with each
of the client's business.major insurance carriers with whom we have established these
arrangements, and we believe that our arrangements are appropriate and that any
changes to compensation arrangements in the future will have minimal impact on
CBIZ, barring future regulatory action. Future regulatory action may limit or
eliminate our ability to enhance revenue through all current compensation
arrangements, and may result in a diminution of future revenue from these
sources.
CBIZ's Benefits & Insurance Services group operates under one Senior Vice
President, who oversees the three retail regions and their respective regional
directors, as well as each of the National Services companies.
The CompanyBenefits & Insurance group has developed detailed
personnel guides,grown in recent years due to
acquisitions, the expansion of our client base, and in part due to rising
healthcare costs which set forth a systematic approach to administering
personnel policiespositively impacted the group benefits business and
practices, including recruiting, discipline and
termination procedures.increased demand for benefits consulting. In addition, the Company will reviewlife insurance
product line, including executive compensation, bank compensation plans and
revise, if
necessary, personnel policiesindividual life sales, has also prospered due to continued favorable tax
treatment and employee handbooksestate planning concerns among the general public. CBIZ expects
growth to continue in the benefits and insurance group based on our intention to
aggressively pursue appropriate acquisitions, continue to provide superior
consulting and brokerage services for our commercial clients, increase our sales
staff in select markets, and seek cross-serving opportunities within CBIZ to
garner new business and grow market share and strengthen existing client
relationships in order to promote retention.
The Benefits & Insurance group contributed approximately $152.2 million of
revenue, or will create customized
handbooks for its clients.
INFORMATION TECHNOLOGY CONSULTING SERVICES.29.3% of CBIZ's annual revenue, in 2004.
National Practices. The Company offers a wide
range ofbusiness units that comprise CBIZ's National
Practices group offer services in the following areas: payroll processing and
administration; valuation services including financial valuations, tangible and
intangible asset valuations and litigation support services; property tax
consulting, compliance and administrative services; mergers and acquisitions
services; health care consulting; government relations; and
6
information technology services, from creating strategic technology
plans to developing and implementing software and hardware solutions.
Specifically, the Company providesconsulting, including strategic technology planning,
project management, development, of Internet/Intranet applications including Internet
security, custom software development,network design and implementation, of both wide
access network ("WAN") and local access network ("LAN") networks, and accounting
software
selection and implementation.implementation and telephony. CBIZ's medical practice management
business, CBIZ Medical Management Professionals (CBIZ MMP), is managed within
the National Practices group and is described below.
The Company utilizes a methodology,business units within the National Practices group report to CBIZ's
President and Chief Operating Officer.
The National Practices group contributed approximately $158.7 million of
revenue, or 30.5% of CBIZ's annual revenue, in which business needs drive technology, ensuring appropriate technical solutions
for2004. Included in 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 hoursresults of
the Company's receiptNational Practices group are those of the data electronically submitted from the
client. The Company's system is highly configurableCBIZ MMP, which contributed
approximately $87.3 million of revenue, or 16.8% of CBIZ's annual revenue, in
2004.
CBIZ MMP. CBIZ's wholly-owned subsidiary, CBIZ MMP, provides coding and
billing as well as full-practice management services for hospital-based
physicians practicing anesthesiology, pathology, radiology, emergency medicine,
and other areas. CBIZ MMP's billing services include: billing and accounts
receivable management; automated claims processing and collection; comprehensive
delinquent claims follow up; compliance programming to meet the specialized
needs of each client yet maintains the ability to provide high volume
processing.government
regulations; and comprehensive statistical and operational reporting. The
system integrates easily with the client'spractice management services provided by CBIZ MMP include: financial reporting,
accounts payable, payroll, general ledger human
resourcesprocessing; design of physician
employment, stock and timecompensation arrangements; and attendance systems. In addition, the Company offers many
sophisticated features, including the automatic enrollmentcomprehensive budgeting,
forecasting, and trackingfinancial analysis. Additionally, CBIZ MMP conducts analyses of
paid
time off, proration of compensation for new hires, integrated garnishment
processing, escrow servicesmanaged care contracts with a focus on negotiation strategies, pricing, cost
containment and funds administration services. The Company
assumes responsibility for payrollutilization tracking; reviews and attendant recordkeeping, payroll tax
deposits, payroll tax reporting, and all federal, state, county
6
7
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 planningnegotiates contracts with
hospitals 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 analysisentities; identifies and underwriting capabilities with claims
administrationcoordinates practice merger 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, claimsintegration opportunities; 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.coordinates practice expansion efforts.
SALES AND MARKETING
NETWORK AND ACCOUNT MANAGEMENT
The Company'sCBIZ's key competitive factors in obtainingattracting and retaining clients for business
services are ainclude
our:
- long-term established relationships;
- industry and technical expertise of our professional staff;
- strong existing sales networklocal and marketing program, established
relationships and theregional presence;
- ability to match client requirements with available services;
- ability to offer a number of services from one provider; and
products- ability to offer services at competitive prices. The Companyrates.
CBIZ 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 namemarketing strategy
with the
name and resources of a national company. The Company expects that as it expands
through internal growth and acquisitions, itnationally branded company, we will be able to
take advantage of
economies of scale in purchasing a range of services and products and to
cross-marketsignificantly increase our market penetration. CBIZ expects that we can
cross-serve new products and services to existing clients who do not currently
utilize all of the services CBIZ offers.
CBIZ's primary marketing strategy is to deepen our relationships with
clients by providing them with additional CBIZ services that would be in the
Company offers. The Companybest 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. This 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, has developed marketing plans that consider the needs of all
CBIZ business units in a common local area. While each business unit continues
to be individually responsible for executing a marketing plan 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. CBIZ continues to be focused on
creating business development tools and programs on a national level that can be
easily customized for use at the local level. Additionally, CBIZ has developed a
centralized client database, CNECT, which is now being utilized by a majority of
our locations. CNECT supports marketing and distribution efforts such as
improved client service, new business development
7
and product development. New clients are generated primarily through local
networking, referrals from existing clients, and targeted new business efforts.
CUSTOMERS
CBIZ provides itsprofessional business services to approximately 80,000
clients. CBIZ's clients prefer to focus their resources on operational
competencies while outsourcing non-core administrative functions to CBIZ.
Outsourcing administrative functions allows clients to enhance productivity,
reduce costs and products throughimprove service, quality and efficiency by focusing on their
core business. Depending on 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 intendsclient's size and capabilities, it may choose to
utilize its Comprehensive networksome or many 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 theCBIZ's 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'swhich it typically
accesses initially through its original CBIZ representative.
CBIZ's clients come from a large variety of industries and markets. The Companymarkets, and no
single client individually comprises more than 3.0% of our total consolidated
revenue. Edward Jones, a financial services firm and client of CBIZ Network
Solutions for electronic networking and information services, is our largest
client and contributed approximately 2.7% of CBIZ's consolidated revenue in
2004.
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 outsourcedprofessional 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
7
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 operatorsprofessional
services firms and a large number of relatively small independent operatorsfirms in local
markets. SomeCBIZ's competitors in the professional business services industry
include, but are not limited to, independent consulting services companies,
independent accounting and tax firms, payroll service providers, and divisions
of these competitors, which
include publicdiversified services companies, may have greater financial resources thansuch as insurance brokers and banks.
ACQUISITIONS AND DIVESTITURES
CBIZ seeks to strengthen its operations and customer service capabilities
by making acquisitions in markets where it currently operates and where the
Company.
The Company may also face competition for acquisition candidates from these
companies, manyprospects are favorable to increase its market share and become a more
significant provider of who have acquired a number of various typescomprehensive range of business services. During 2004,
CBIZ acquired benefits and brokerage firms in Owing Mills, MD, and Chicago, IL,
a technology firm in Cleveland, OH and an accounting firm in Denver, CO. CBIZ
will continue to actively seek acquisitions in the future.
In 2004, CBIZ sold or closed five business operations in an effort to
rationalize our business by divesting units that were either underperforming,
located in secondary markets, or did not provide the level of synergistic
cross-serving opportunities with other CBIZ businesses that is desired. These
divestitures are consistent with CBIZ's plan to focus on metropolitan markets in
which we can strengthen our core service providersofferings. Going forward, CBIZ may,
from time to time, recognize additional gains and/or losses on divestitures.
REGULATION
CBIZ's operations are subject to regulations by federal, state, and local
governing bodies. Accordingly, our business services may be impacted by
legislative changes by these bodies, particularly with respect to provisions
relating to payroll, benefits administration and insurance services, pension
plan administration, tax and accounting. CBIZ remains abreast of regulatory
changes affecting our business, as these changes often affect clients'
activities with respect to employment, taxation, benefits, and accounting. For
instance, changes in recent years.income, estate, or property tax laws may require additional
consultation with clients subject to these changes to ensure their activities
comply with revised regulations.
8
CBIZ itself is subject to industry regulation and changes, including
changes in laws, regulations, and codes of ethics governing its accounting,
insurance, valuation, and broker-dealer operations, as well as in other
industries, the interpretation of which may restrict CBIZ's operations. CBIZ is
currently in compliance with laws and regulations that have been recently
changed or imposed, and is not aware of any proposed changes that will have a
negative impact on CBIZ's operations, or our ability to comply with such
existing or proposed regulations.
CBIZ is subject to certain privacy and information security laws and
regulations, including, but not limited to those under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA), The CompanyFinancial Modernization
Act of 1999 (the Gramm-Leach-Bliley Act), and other provisions of federal and
state law which may restrict CBIZ's operations and give rise to expenses related
to compliance. CBIZ is currently in compliance with such laws and regulations,
and expects to remain in compliance in future periods.
As a public company, CBIZ is subject to the provisions of the
Sarbanes-Oxley Act of 2002 to reform the oversight of public company auditing,
improve the quality and transparency of financial reporting by those companies
and strengthen the independence of auditors. CBIZ is currently in compliance
with those requirements.
LIABILITY INSURANCE
CBIZ carries policies including those for commercial general liability,
automobile liability, property, crime, professional liability, directors and
officers liability, fiduciary liability, employment practices liability and
workers' compensation subject to prescribed state mandates. Excess liability is
carried over the underlying limits provided by the commercial general liability
and automobile liability policies.
EMPLOYEES
At December 31, 2004, CBIZ employed approximately 4,900 employees,
approximately half of whom hold professional certifications or degrees. CBIZ
believes that it has a good relationship with its employees. CBIZ realizes that
as a professional services company that differentiates itself from competitors
through the quality and diversity of our service offerings, the Company's
employees are our most important asset. Accordingly, CBIZ strives to remain
competitive as an employer while increasing the capabilities and performance of
our employees.
SEASONALITY
A disproportionately large amount of CBIZ's revenue occurs in the first
half of the year. This is due primarily to our accounting and tax practice,
which is subject to seasonality related to heavy volume in the first four months
of the year. CBIZ's ATA group generated approximately 43% of its revenue in the
first four months of 2004. Like most professional service companies, most of
CBIZ's operating costs are fixed, resulting in higher operating margins in the
first half of the year.
PROPERTIES
CBIZ's corporate headquarters is located at 6050 Oak Tree Boulevard, South,
Suite 500, Cleveland, Ohio 44131, in leased premises. Some of CBIZ's property
and equipment are subject to liens securing payment of indebtedness of CBIZ and
its subsidiaries. CBIZ and its subsidiaries lease more than 140 offices in 34
states, the District of Columbia and one in Toronto, Canada, as well as office
equipment and company vehicles. As CBIZ continues to consolidate and rationalize
its operations, we expect to reduce the number of leases we currently hold. CBIZ
believes that our current facilities are sufficient for our needs.
OTHER INFORMATION
Our website is located at http://www.cbiz.com. CBIZ makes available, free
of charge on its website, through the Investor Information page, its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to all those reports as soon as reasonably practicable after
CBIZ files (or furnishes) such reports with the U.S. Securities and Exchange
Commission. In addition, our corporate code of conduct and ethics and the
charters of the Audit Committee, the Compensation Committee and the Nominating
9
and Governance Committee of the Board of Directors are available on the Investor
Relations page of CBIZ's website, referenced above, and in print to any
shareholder who requests them.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Annual Report, including without limitation, "Business and
Properties" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding CBIZ's financial position, business strategy
and plans and objectives for future performance are forward-looking statements.
You can identify these statements by the fact that they do not relate strictly
to historical or current facts. Forward-looking statements are commonly
identified by the use of such terms and phrases as "intends," "believes,"
"estimates," "expects," "projects," "anticipates," "foreseeable future,"
"seeks," and words or phases of similar import in connection with any discussion
of future operating or financial performance. In particular, these include
statements relating to future actions, future performance or results of current
and anticipated services, sales efforts, expenses, and financial results. From
time to time, we also may provide oral or written forward-looking statements in
other materials we release to the public. Any or all of our forward-looking
statements in this 10-K, in the 2004 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. Our 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 the quarterly, periodic and annual reports we file with the SEC.
Also note that we provide the following cautionary discussion of risks,
uncertainties and possibly inaccurate assumptions relevant to our businesses.
These are factors that we think could cause our actual results to differ
materially from expected and historical results. Other factors besides those
described here could also adversely affect operating or financial performance.
This discussion is provided as permitted by the Private Securities Litigation
Reform Act of 1995.
FACTORS THAT MAY EFFECT FUTURE RESULTS
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.
A REVERSAL OF OR DECLINE IN THE CURRENT TREND OF OUTSOURCING BUSINESS SERVICES
MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Our business and growth depend in large part on the trend toward
outsourcing business services. We can give you no assurance that this trend in
outsourcing will continue. Current and potential customers may elect to perform
such services with their own employees. A significant reversal of, or a decline
in, this trend would have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE MORE SENSITIVE TO REVENUE FLUCTUATIONS THAN OTHER COMPANIES, WHICH
COULD RESULT IN FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK.
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 has and will continue to affect our
business. Potential new clients may defer from switching service providers when
they believe economic conditions are unfavorable. Any of these
10
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 COLLECTIBLE.
Professional services firms often experience higher average accounts
receivable days outstanding compared to many other industries. If collections
become slower, our liquidity may be adversely impacted. We monitor the aging of
receivables regularly and make assessments of the ability of customers to pay
amounts due. We accrue for potential bad debts each month and recognize
additional reserves against bad debts as we deem it appropriate. Notwithstanding
these measures, our customers may face unexpected circumstances that adversely
impact their ability to pay their trade receivables or note obligations to us
and we may face unexpected losses as a result.
WE ARE DEPENDENT ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY
EMPLOYEES, THE LOSS OF ANY OF WHOM MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our success depends in large part upon the abilities and continued services
of our executive officers and other key employees, such as our business unit
presidents. In the course of business operations, employees may resign and seek
employment elsewhere. Certain principal employees, however, are bound in writing
to non-compete agreements barring competitive employment, client solicitation,
and solicitation of employees for a period of between two and ten years
following his or her resignation. We cannot assure you that we will be able to
competeretain 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 intend to
continue to effectively basedrecruit, 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 OUR ABILITY TO PROVIDE SERVICES TO CLIENTS OF THE ATTEST FIRMS
WITH WHICH WE HAVE CONTRACTUAL RELATIONSHIPS AND THE ABILITY OF SUCH ATTEST
FIRMS TO PROVIDE ATTESTATION SERVICES TO CLIENTS OF OURS.
Restrictions imposed by independence requirements and state accountancy
laws and regulations preclude CBIZ from rendering audit and attest services
(other than internal audit services). As such, CBIZ and its (i) broadsubsidiaries
maintain joint-referral relationships and administrative service agreements
(ASAs) with independent licensed Certified Public Accounting (CPA) firms under
which audit and attest services may be provided to CBIZ's clients by such CPA
firms. These firms are owned by licensed CPAs who are employed by CBIZ
subsidiaries.
Under these ASAs, CBIZ provides a range of high quality services to the CPA firms,
including (but not limited to): administrative functions such as office,
bookkeeping, and products, (ii) knowledgeableaccounting; preparing marketing and trained personnel, (iii) entrepreneurial culture, (iv) large number of
locations, (v) diversity of geographic coverage, (vi) operational economies of
scalepromotion materials;
providing office space, computer equipment, and (vii) decentralized operating structure.
The Company's competitorssystems support; and leasing
administrative and professional staff. Services are performed in exchange for a
fee. Fees earned by CBIZ under the ASAs are recorded as revenue in the
business outsourcing services industry
include independent consulting services companies, divisionsaccompanying consolidated statements of diversified
enterprisesoperations. In the event that accounts
receivable and banks.
REGULATION
The Company's outsourced business services are vulnerableunbilled work in process become uncollectible by the CPA firms,
the service fee due to legislative
law changes withCBIZ is reduced on a pro-rata basis.
With respect to the provision of payroll, employee benefits and
pension plan administration, tax accounting and workers' compensation design and
administration services. Legislative changes may expand or contract the types
and amounts of business servicesCPA firm clients that are required to file audited
financial statements with the SEC, the SEC staff views CBIZ and the CPA firms
with which we have contractual relationships as a single entity in applying
independence rules established by individualsthe accountancy regulators and businesses.the SEC.
Accordingly, we do not hold any financial interest in an SEC-reporting attest
client of an associated CPA firm, enter into any business relationship with an
SEC-reporting attest client that the CPA firm performing an audit could not
maintain, or sell any non-
11
audit services to an SEC-reporting attest client that the CPA firm performing an
audit could not maintain, under the auditor independence limitations set out in
the Sarbanes-Oxley Act of 2002 and other professional accountancy independence
standards. Applicable professional standards generally permit the ATA practice
group to provide additional services to privately-held companies, in addition to
those services which may be provided to SEC-reporting attest clients of an
associated CPA firm. CBIZ and the CPA 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. Given the pre-existing limits set by CBIZ on its
relationships with SEC-reporting attest clients of associated CPA firms, and the
limited number and size of such clients, the imposition of Sarbanes-Oxley Act
independence limitations did not and is not expected to materially affect CBIZ
revenues.
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
accountancy authorities will not extend current restrictions on the profession
to include private companies. To the extent that licensed CPA firms for whom we
provide administrative and other services are affected, we may experience a
decline in fee revenue from these businesses as well. To date, revenues derived
from providing services in connection with attestation engagements of the attest
firms performed for SEC-reporting clients have not been material.
GOVERNMENTAL REGULATIONS AND INTERPRETATIONS ARE SUBJECT TO CHANGES.
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 RISKS RELATING TO PROCESSING CUSTOMER TRANSACTIONS FOR OUR
PAYROLL, MEDICAL PRACTICE MANAGEMENT, PROPERTY TAX MANAGEMENT, AND OTHER
TRANSACTION PROCESSING BUSINESSES.
The high volume of client funds and data processed by us in our transaction
related businesses entails risks for which we may be held liable if the accuracy
or timeliness of the transactions processed is not correct. We could incur
significant legal expense to defend any claims against us, even those claims
without merit. While we carry insurance against these potential liabilities, we
cannot be certain that circumstances surrounding such an error would be entirely
reimbursed through insurance coverage. We believe we have controls and
procedures in place to address our fiduciary responsibility and mitigate these
risks. However, if we are not successful in managing these risks, our business,
financial condition and results of operations may be harmed.
WE ARE SUBJECT TO RISK AS IT RELATES TO SOFTWARE THAT WE LICENSE FROM THIRD
PARTIES.
We license software from third parties, much of which is integral to our
systems and our business. The licenses are terminable if we breach our
obligations under the license agreements. If any of these relationships were
terminated or if any of these parties were to cease doing business or cease to
support the applications we currently utilize, we may be forced to spend
significant time and money to replace the licensed software. However, we cannot
assure you that the necessary replacements will be available on reasonable
terms, if at all.
WE COULD BE HELD LIABLE FOR ERRORS AND OMISSIONS.
All of our professional business services entail an inherent risk of
professional malpractice and other similar claims. Therefore, we maintain errors
and omissions insurance coverage. Although we believe that our insurance
coverage is adequate, we cannot be certain that actual future claims or related
legal expenses would not exceed the coverage amounts. In addition, we cannot be
certain that the different insurance carriers which provide errors and omissions
coverage for different lines of our business will not dispute their obligation
to cover a particular claim. If we have a large claim, or a large number of
claims, on our insurance, the rates for such insurance may increase, and amounts
expended in defense or settlement of these claims prior to exhaustion of
deductible or self-
12
retention levels may become significant, but contractual arrangements with
clients may constrain our ability to incorporate such increases into service
fees. Insurance rate increases, disputes by carriers over coverage questions,
payments by us within deductible or self-retention limits, as well as any
underlying claims or settlement of such claims, could have a material adverse
effect on our business, financial condition and results of operations.
OUR PRINCIPAL STOCKHOLDERS MAY HAVE SUBSTANTIAL CONTROL OVER OUR OPERATIONS.
As of February 28, 2005, the stockholders identified below owned the
following aggregate amounts and percentages of our common stock, including
shares that may be acquired by exercising options:
- approximately 15,250,278 shares, representing 20.1% of all our
outstanding common stock, were owned by Michael G. DeGroote;
- approximately 4,617,199 shares, representing 6.1% of all our outstanding
common stock, were owned by Cardinal Capital Management LLC;
- approximately 4,209,794 shares, representing 5.5% of all our outstanding
common stock, were owned by Dimensional Fund Advisors Inc.;
- approximately 27,362,259 shares, representing 36.1% of all our
outstanding common stock, were owned by our executive officers,
directors, and the foregoing as a group.
Because of their stock ownership, these stockholders may exert substantial
influence or actions that require the consent of a majority of our outstanding
shares, including the election of directors. CBIZ's share repurchase activities
may serve to increase the ownership percentage of these individuals and
therefore increase the influence they may exert, if they do not participate in
these share repurchase transactions.
WE HAVE SHARES ELIGIBLE FOR FUTURE SALE THAT COULD ADVERSELY AFFECT THE 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 76 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
expired by the end of 2001. As of February 28, 2005, approximately 260,000
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
February 28, 2005, we also have, registered under the Securities Act, 15 million
shares of our common stock, nearly all of which remain available to be offered
from time to time by us in connection with acquisitions under our acquisition
shelf registration statement.
WE ARE RELIANT ON INFORMATION PROCESSING SYSTEMS.
Our ability to provide 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 business services.
13
WE MAY NOT BE ABLE TO ACQUIRE AND FINANCE ADDITIONAL BUSINESSES WHICH MAY
LIMIT OUR ABILITY TO PURSUE OUR BUSINESS STRATEGY.
We made four acquisitions in 2004, and it is our intention to selectively
acquire businesses that are provided today by existing laws.
SPECIALTY INSURANCEcomplementary 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
completed, will perform as expected or will contribute significant revenues or
profits. In addition, we may also face increased competition for acquisition
opportunities, which may inhibit our ability to complete transactions on terms
that are favorable to us. There are certain provisions under our credit facility
that may limit 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. However, management believes that
funds available under the credit facility, along with cash generated from
operations, will be sufficient to meet our liquidity needs, including planned
acquisition activity, in the foreseeable future. See Note 7 to CBIZ's
consolidated financial statements included herewith.
THE BUSINESS SERVICES GENERAL
Through its insurance subsidiaries, Century providesINDUSTRY IS COMPETITIVE AND FRAGMENTED. IF WE ARE UNABLE
TO COMPETE EFFECTIVELY, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS MAY BE HARMED.
We face competition from a number of sources in both the business services
industry and from specialty insurance bonding servicesagencies. Competition in both industries
has led to consolidation. Many of our competitors are large companies that may
have greater financial, technical, marketing and workers' compensation coverage to small and medium sized
companies throughout the United States. The following is a description of the
specialty insurance, bonding services and workers' compensation programs
currently offered by Century.
OPERATIONS
The products provided by Century's insurance subsidiaries can be divided
into three categories of specialty insurance services: commercial liability
lines, which constitute approximately 84.0% of the Company's specialty insurance
business; surety bonds, which constitute 13.5%; and workers' compensation
coverage, which constitutes 2.5% of the Company's specialty insurance business.
In addition, Century employs reinsurance to limit its exposure on policies 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 resources 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 must 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.
8
9
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.us. In
addition to other
underwriting quality control measures, a continuous audit process for each
general agent is maintained. At least once a year, a visit to each agent's
office is arranged to review all ofthese large companies and specialty insurance agencies, we face
competition in the foregoing areas,business services industry from in-house employee services
departments, local business services companies and independent consultants, as
well as premium
production, lossesfrom 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 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 bondsrespond accordingly, we cannot assure you
that government authorities and some
private entities require construction contractors to post to provide assurance
that contract workwe will be performedable to anticipate and successfully respond to such trends in a
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 somanner. We cannot be certain 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
9
10
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 landfillswe 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 excesscompete successfully
against current and surplus lines basis, which meansfuture competitors, or 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
10
11
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 admitted 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
11
12
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.
LIABILITY INSURANCE AND BONDING
Century 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 and
employer's liability policies. See "Legal Proceedings."
EMPLOYEES
At December 31, 1997, Century employed approximately 1,200 employees. The
Company considers its relationships with its employees to be good.
PROPERTIES
Century's corporate headquarters is 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 to 6480 Rockside Woods Blvd., South, Suite 330, Cleveland, Ohio
44131 during the first quarter of 1998. Certain of the property and equipment of
the Company are subject to liens securing payment of portions of the
indebtedness of the Company and its subsidiaries. The Company's subsidiaries
also lease 74 offices in 26 states and certain of their equipment. The Company
believes that its facilities are sufficient for its needs.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Company's subsidiaries are parties to legal proceedings, which have
arisen, in the ordinary course of their business. Although it is possible that
losses exceeding amounts already reserved may be incurred upon ultimate
resolution of these matters, management believes that such losses, if any,pressure will not
have a material adverse effect on our business, financial condition and results
of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has entered into settlements to resolve the Company's businessHeritage Bond
Litigation, comprised of multiple lawsuits pending in the Central District of
California arising from losses sustained by investors in numerous municipal bond
offerings between December 1996 and March 1999. In those lawsuits, plaintiffs
alleged numerous claims, including mismanagement and misappropriation of funds
from the bond offerings, against unrelated parties, including the Heritage
Entities and the trustee, U.S. Trust Corp. The Betker Action, CV 02-5752-DT
(RCx), includes claims against two entities acquired by the Company, Valuation
Counselors Group, Inc. ("VC") and Zelenkofske, Axelrod & Co., Ltd. ("ZA"), for
negligent misrepresentation and negligence, and for joint and several liability
under California Corporations Code sec. 25504.2 (against VC only). In the
Consolidated Class Action, 02-ML-1475-DT (RCx), the Court permitted plaintiffs
to substitute CBIZ Valuation Group, Inc. ("CBIZ-VC") in place of VC, and CBIZ
Accounting, Tax & Advisory, Inc. ("CBIZ-ZA") in place of ZA, as defendants. In
addition, plaintiffs named Century Business Services, Inc. ("CBIZ") itself as a
defendant. CBIZ-VC and CBIZ-ZA are subsidiaries of CBIZ. That complaint includes
claims against CBIZ, CBIZ-VC and CBIZ-ZA for negligence, and claims against
CBIZ-VC and CBIZ-ZA for conspiracy to commit fraud, negligent misrepresentation
and intentional misrepresentation. These claims have been pending since 2001 and
relate to the provision of valuation and feasibility study services from 1996
through 1999. Management believes that the settlements are fair, reasonable and
adequate, and in the best interests of all parties concerned. The settlement of
the Consolidated Class Action has been preliminarily approved by the Court,
which also entered an order approving notice to the Class. The Class Settlement
is conditioned upon, among other things, standard class action opt-out
procedures, objections by litigants, the Court's entry of a bar order and final
judicial approval of
14
the settlement by the Court after notice to the class. The settlement of the
Betker Action has been approved by the Court and is subject to, among other
things, the final entry of a bar order. Additional proceedings may be necessary
as a consequence of any opt-out or financial
position; however, unfavorableobjection that may occur. The resolution of
each matter individually or inthese matters did not have a material adverse effect on the aggregate could affect the consolidatedfinancial condition,
results of operations foror cash flows of the quarterly
periodsCompany.
In addition to those items disclosed above, 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.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 our Common Stock as reported on the Nasdaq National Market for
the periods indicated.
2004 2003
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First quarter.......................................... $5.15 $3.34 $2.99 $2.30
Second quarter......................................... $5.12 $4.00 $3.27 $2.50
Third quarter.......................................... $4.95 $3.85 $4.85 $3.10
Fourth quarter......................................... $4.74 $4.06 $4.90 $3.80
On OctoberDecember 31, 2004, the last reported sale price of CBIZ's Common Stock
as reported on the Nasdaq National Market (Nasdaq Amex-Online) was $4.36 per
share. As of February 28, 2005, CBIZ had approximately 8,100 holders of record
of its common stock, and the last sale of CBIZ's common stock as of that date
was $4.19.
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 has discretion over 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 does not permit CBIZ to declare or make any dividend payments, other
than dividend payments made by one of its wholly owned subsidiaries to the
parent company. CBIZ currently intends to retain future earnings to finance the
ongoing operations and growth of the business. Any future determination as to
dividend policy will be made at the discretion of the Board of Directors and
will depend on a number of factors, including future earnings, capital
requirements, financial condition and future prospects, limitations on dividend
payments pursuant to credit or other agreements and such other factors as the
Board of Directors may deem relevant.
ISSUER PURCHASES OF EQUITY SECURITIES
On March 3, 2004, the Board of Directors authorized a share repurchase of
up to 8.5 million shares of CBIZ common stock. A supplement to the plan was
approved by the Board of Directors on May 27, 2004, authorizing CBIZ to purchase
an additional 2.0 million shares of CBIZ common stock, for a total of 10.5
million shares. These plans expired on December 31, 2004, and subsequently on
February 10, 2005, the Board of Directors authorized the purchase of up to 5.0
million shares of CBIZ common stock during 2005. Stock repurchase activity
during the year ended December 31, 2004 is summarized in the table below (in
thousands, except per share data).
16
ISSUER PURCHASES OF EQUITY SECURITIES
MAXIMUM
TOTAL NUMBER NUMBER OF
TOTAL OF SHARES SHARES THAT
NUMBER AVERAGE PURCHASED AS MAY YET BE
OF SHARES PRICE PAID PART OF PUBLICLY PURCHASED
PERIOD PURCHASED PER SHARE (1) ANNOUNCED PLAN UNDER THE PLAN
- ------ --------- ------------- ---------------- --------------
January 1 - September 30, 2004
Tender offer........................ 7,500 $5.04 7,500 3,000
Open market purchases(3)............ 1,757 $4.25 1,757 1,243
------ ------
Total through September 30,
2004........................... 9,257 $4.89 9,257
October 1 - October 31, 2004(2),(3)... 135 $4.63 135 1,108
November 1 - November 30,
2004(2),(3)......................... 476 $4.42 476 632
December 1 - December 31,
2004(2),(3)......................... 556 $4.33 556 76
------ ------
Total fourth quarter purchases...... 1,167 $4.40 1,167
------ ------
Total purchases during the year ended
December 31, 2004................... 10,424 $4.84 10,424
====== ======
- ---------------
(1) Average price paid per share includes fees and commissions.
(2) Open market purchases.
(3) The Company utilized a Rule 10b5-1 trading plan to allow for repurchases by
the Company during periods when it would not normally be active in the
trading market due to regulatory restrictions. Under the Rule 10b5-1 trading
plan, the Company was unable to repurchase shares above a pre-determined
price per share. Additionally, the maximum number of shares purchased by the
Company each day was governed by Rule 10b-18.
17
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. 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 notes thereto, which are
included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2004 2003 (3) 2002 (3) 2001 (3) 2000 (3)
-------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
STATEMENT OF OPERATIONS DATA:
Revenue................................... $520,057 $506,782 $492,955 $502,639 $ 538,513
Operating expenses........................ 459,357 441,652 434,389 433,659 478,333
-------- -------- -------- -------- ---------
Gross margin.............................. 60,700 65,130 58,566 68,980 60,180
Corporate general and administrative
expense................................. 24,773 19,518 19,177 20,343 28,855
Depreciation and amortization expense..... 16,428 17,089 20,361 40,348 44,764
-------- -------- -------- -------- ---------
Operating income (loss)................... 19,499 28,523 19,028 8,289 (13,439)
Other income (expense):
Interest expense...................... (1,507) (1,055) (2,477) (6,797) (12,088)
Goodwill impairment................... -- -- -- -- (32,953)
Gain (loss) on sale of operations,
net................................. 996 2,519 930 (7,113) (31,576)
Other income (expense), net........... 3,554 (1,209) (1,567) 4,403 (1,634)
-------- -------- -------- -------- ---------
Total other income (expense)........ 3,043 255 (3,114) (9,507) (78,251)
Income (loss) from continuing operations
before income tax expense............... 22,542 28,778 15,914 (1,218) (91,690)
Income tax expense........................ 5,691 12,495 8,154 12,097 869
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations.............................. 16,851 16,283 7,760 (13,315) (92,559)
Loss from operations of discontinued
businesses, net of tax.................. (932) (1,693) (2,130) (2,685) (15,915)
Gain (loss) on disposal of discontinued
businesses, net of tax.................. 132 726 (2,471) -- (5,697)
Cumulative effect of change in accounting
principle, net of tax................... -- -- (80,007) -- (11,905)
-------- -------- -------- -------- ---------
Net income (loss)......................... $ 16,051 $ 15,316 $(76,848) $(16,000) $(126,076)
======== ======== ======== ======== =========
Basic weighted average common shares...... 79,217 90,400 94,810 94,818 94,674
Diluted weighted average common
shares(2)............................... 81,477 92,762 96,992 94,818 94,674
Basic earnings (loss) per share:
Continuing operations................... $ 0.21 $ 0.18 $ 0.08 $ (0.14) $ (0.98)
Discontinued operations................. (0.01) (0.01) (0.05) (0.03) (0.22)
Cumulative effect of accounting
change................................ -- -- (0.84) -- (0.13)
-------- -------- -------- -------- ---------
Net income (loss)....................... $ 0.20 $ 0.17 $ (0.81) $ (0.17) $ (1.33)
======== ======== ======== ======== =========
Diluted earnings (loss) per share:
Continuing operations................... $ 0.21 $ 0.18 $ 0.08 $ (0.14) $ (0.98)
Discontinued operations................. (0.01) (0.01) (0.05) (0.03) (0.22)
Cumulative effect of accounting
change................................ -- -- (0.82) -- (0.13)
-------- -------- -------- -------- ---------
Net income (loss)....................... $ 0.20 $ 0.17 $ (0.79) $ (0.17) $ (1.33)
======== ======== ======== ======== =========
OTHER DATA:
Total assets.............................. $413,773 $402,145 $433,111 $528,349 $ 649,494
Long-term debt............................ $ 55,398 $ 14,985 $ 18,084 $ 55,888 $ 118,655
Total liabilities......................... $167,276 $124,307 $138,793 $157,702 $ 262,556
Total stockholders' equity................ $246,497 $277,838 $294,318 $370,647 $ 386,938
PRO FORMA NET INCOME(1):
Net income (loss) from continuing
operations.............................. $ 16,851 $ 16,283 $ 7,760 $ 7,234 $ (65,135)
Basic earnings (loss) per share........... $ 0.21 $ 0.18 $ 0.08 $ 0.08 $ (0.69)
Diluted earnings (loss) per share(2)...... $ 0.21 $ 0.18 $ 0.08 $ 0.08 $ (0.69)
- ---------------
(1) Pro forma net income (loss) represents income from continuing operations
assuming the change in accounting principle for Financial Accounting
Standards Board (SFAS) No. 142, adopted January 1, 2002, was applied
retroactively, net of taxes, for all periods presented.
(2) Pro forma diluted weighted average common shares for 2001 are 96,442, as the
effect of the incremental shares are not anti-dilutive on a pro forma basis.
(3) Certain amounts have been reclassified to conform to the current year
presentation.
18
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 at December 31, 2004 and 2003, and results of
operations and cash flows for each of the years ended December 31, 2004, 2003
and 2002. This discussion should be read in conjunction with CBIZ's consolidated
financial statements and notes thereto included elsewhere in this Annual Report.
OVERVIEW
CBIZ provides professional business services to businesses of various
sizes, as well as individuals, governmental entities and not-for-profit
enterprises throughout the United States (see further description under Items 1
and 2 "Business and Properties"). The substantial portion of our revenue is
derived from professional service activities provided for our clients, and our
revenue is driven by our ability to generate new opportunities, by the prices we
obtain for our service offerings and by the utilization of our professional
workforce.
CBIZ seeks to strengthen its operations and customer service capabilities
by making acquisitions in markets where it currently operates and where the
prospects are favorable to increase its market share and become a more
significant provider of a comprehensive range of business services. During 2004,
CBIZ acquired benefits and brokerage firms in Owing Mills, MD, and Chicago, IL,
a technology firm in Cleveland, OH and an accounting firm in Denver, CO. CBIZ
will continue to actively seek acquisitions under the same strategy earlier
described.
As part of its strategy to promote and strengthen cross-serving, CBIZ has
continued its program of consolidating and co-locating fragmented markets. This
program is expected to continue in 2005, specifically in the Denver, Atlanta and
San Diego markets. CBIZ also plans to continue consolidation activities that
have been initiated in the Chicago market.
CBIZ continually evaluates its business operations, and may from time to
time sell or close operations that are underperforming, located in secondary
markets, or do not provide the level of synergistic cross-serving opportunities
with other CBIZ businesses that is desired. During 2004, CBIZ sold or closed
five business operations in an effort to rationalize our business by divesting
units that were either underperforming, located in secondary markets, or did not
provide the level of synergistic cross-serving opportunities with other CBIZ
businesses that is desired. These divestitures are consistent with CBIZ's plan
to focus on metropolitan markets in which we can strengthen our core service
offerings. Going forward, CBIZ may, from time to time, recognize additional
gains and/or losses on divestitures.
CBIZ believes that repurchasing shares of its common stock is a use of cash
that provides value to stockholders, and accordingly completed a tender offer in
April 2004. The tender offer resulted in the purchase of approximately 7.5
million shares of common stock at a purchase price of $5.00 per share, or a
total cost (including expenses) of approximately $37.8 million. In addition,
CBIZ completed open market repurchases of approximately 2.9 million shares at a
cost of approximately $12.6 million during the year ended December 31, 2004. The
credit facility and net cash provided by CBIZ operations were utilized to fund
the share repurchases. On February 10, 2005, the Board of Directors authorized
the purchase of up to 5.0 million shares of CBIZ common stock during 2005. The
shares may be repurchased in the open market or through privately negotiated
purchases.
Effective August 9, 2004, CBIZ completed a modification of its credit
facility. The new facility has a total commitment amount of $100.0 million, and
expires August 2009. The modified credit facility is discussed in further detail
in the notes to the accompanying consolidated financial statements.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
Operating Practice Groups
CBIZ currently delivers products and services through three practice
groups. A brief description of these groups' operating results and factors
affecting their businesses is provided below. The services offered under each of
these groups are described in Part I of this report.
19
Same-unit revenue represents total revenue adjusted to reflect comparable
periods of activity for acquisitions and divestitures. For example, for an
operation divested on July 1, 2004, revenue from the periods July 1 through
December 31, 2003 are reported as revenue from divested operations; thus,
same-unit revenue includes revenue for the periods January 1 through June 30 of
both years. Revenue from divested operations represents operations that did not
meet the criteria for treatment as discontinued businesses.
Accounting, Tax and Advisory Services.
2004 2003 CHANGE
-------- -------- ------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit............................................ $203,604 $197,216 $6,388
Acquired businesses.................................. 5,473 -- 5,473
Divested operations.................................. -- 2,396 (2,396)
-------- -------- ------
Total revenue..................................... $209,077 $199,612 $9,465
Percent of total CBIZ revenue.......................... 40.2% 39.4%
Operating expenses..................................... 180,282 174,452 5,830
-------- -------- ------
Gross margin........................................... $ 28,795 $ 25,160 $3,635
======== ======== ======
Gross margin percent................................... 13.8% 12.6% 1.2%
Same-unit revenue for the twelve months ended December 31, 2004 increased
by $6.4 million or 3.2% from the twelve months ended December 31, 2003. The
growth experienced for same-unit revenue was primarily due to an increase in the
aggregate number of hours charged to clients for litigation support and
Sarbanes-Oxley consulting services, combined with modest price increases for
traditional accounting and tax services.
The growth in revenue from acquisitions was primarily from Sarbanes-Oxley
consulting services provided by CBIZ HarborView, which was acquired in September
2003, as well as accounting services provided by the acquisitions of firms in
Denver, Colorado, and Orange County, California. Divested operations represent
several smaller units that did not provide opportunity for growth and
cross-serving capabilities.
The largest components of operating expenses for the ATA group are
personnel costs, occupancy costs and professional service fees paid to third
parties, representing 88.1% and 87.3% of total operating expenses for the years
ended December 31, 2004 and 2003, respectively. Personnel costs increased $3.1
million primarily due to increases in staff to accommodate the revenue growth,
as well as annual increases in compensation rates. As a percentage of revenue,
personnel costs were 66.6% and 68.2% for the years ended December 31, 2004 and
2003, respectively. Occupancy costs, which are generally fixed in nature, were
7.1% and 7.3% of revenue for the years ended December 31, 2004 and 2003,
respectively. Professional service fees paid to third parties increased $3.3
million to 2.3% percent of revenue for the year ended December 31, 2004 from
0.8% for the same period a year ago, as the result of outsourced professional
services utilized primarily at two business units; one unit that delivers
services requiring specialization in state agency compliance and CBIZ HarborView
that delivers Sarbanes-Oxley consulting services.
Gross margin has improved by 1.2% for the twelve months ended December 31,
2004, primarily due to growth in Sarbanes-Oxley consulting services, as well as
modest increases in hourly billing rates. CBIZ expects Sarbanes-Oxley consulting
to continue to be strong, and also expects modest increases in hourly billing
rates in 2005 for traditional accounting and tax services. While the accounting
industry is experiencing growth and increases in billing rates, the industry is
also experiencing pricing pressures on compensation, as firms compete for
qualified candidates in the market to support the revenue growth. Due to these
pricing pressures on compensation, CBIZ expects modest improvement in gross
margin in 2005.
20
Benefits & Insurance Services.
2004 2003 CHANGE
-------- -------- --------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit........................................... $150,078 $156,640 $ (6,562)
Acquired businesses................................. 2,162 -- 2,162
Divested operations................................. -- 5,455 (5,455)
-------- -------- --------
Total revenue.................................... $152,240 $162,095 $ (9,855)
Percent of total CBIZ revenue......................... 29.3% 32.0%
Operating expenses.................................... 128,691 128,407 284
-------- -------- --------
Gross margin.......................................... $ 23,549 $ 33,688 $(10,139)
======== ======== ========
Gross margin percent.................................. 15.5% 20.8% (5.3%)
On a same-unit basis, the Benefits & Insurance (B&I) group experienced a
decrease in revenue of $6.6 million, or 4.2% for the twelve months ended
December 31, 2004 compared to a year ago. The decline in revenue is primarily
attributable to one national business unit which experienced lower enrollments
compared with a year ago, and recorded revenue adjustments resulting from higher
policy terminations than originally estimated. This decline was partially offset
by the strength of the group health business, which has experienced an increase
in the number of policies sold.
The increase in revenue from acquired businesses pertains to business units
providing primarily group benefits and property and casualty services in the
Chicago, Salt Lake City, and Maryland markets. The decline in revenue from
divested operations relates primarily to Health Administration Services, which
was sold in May 2003.
The largest components of operating costs for the B&I group are personnel
costs, commissions paid to third party brokers, and occupancy costs,
representing 84.8% and 83.8% of total operating expenses in 2004 and 2003,
respectively. Personnel costs increased as a percentage of revenue to 58.3% from
53.7%, primarily as a result of investments in sales and support personnel
intended to promote organic growth during the year, and also due to the
year-over-year revenue decline. CBIZ expects the investments in sales personnel
to result in margin improvement in future periods, once production levels have
been established. Commissions paid to third party brokers have increased to 7.4%
of revenue in 2004 from 6.8% in 2003, primarily due to a higher portion of
revenue being generated with third party brokers during the current year than a
year ago. Occupancy expenses are relatively fixed in nature, but have increased
as a percent of revenue to 6.0% for the twelve months ended December 31, 2004,
from 5.9% for the comparable period a year ago, primarily due to the decline in
revenue previously discussed.
Gross margin has decreased compared to a year ago, primarily as the result
of the one national business unit mentioned above. This unit has experienced
significant growth over the last three years, which has resulted in system,
client service and other operational challenges. CBIZ has allocated resources to
support the current level of revenue and future growth, and is in the process of
implementing new systems, including a new client service interface. The decline
in revenue, combined with higher expenses to support growth in this unit, have
resulted in a negative impact on gross margin of approximately $7.1 million.
CBIZ believes that the resources dedicated to improve processes and controls at
this insurance unit have positioned the unit for future growth; therefore, CBIZ
expects a significant improvement in revenue, and expects the unit to produce a
modest profit in 2005. CBIZ expects gross margins for the B&I group to return to
historical levels based on the favorable impact on this unit's future results,
combined with continued organic growth from its existing retail businesses
driven by a continuing increase in group health rates.
National Practices Services. The National Practices group contributed
approximately $158.7 million and $145.1 million of revenue, or approximately
30.5% and 28.6% of CBIZ's total revenue for the years ended December 31, 2004
and 2003, respectively.
21
CBIZ Medical Management Professionals (CBIZ MMP)
2004 2003 CHANGE
------- ------- -------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit............................................. $87,261 $75,785 $11,476
Acquired businesses................................... -- -- --
Divested operations................................... -- -- --
------- ------- -------
Total revenue...................................... $87,261 $75,785 $11,476
Percent of total CBIZ revenue........................... 16.8% 15.0%
Operating expenses...................................... 71,885 61,566 10,319
------- ------- -------
Gross margin............................................ $15,376 $14,219 $ 1,157
======= ======= =======
Gross margin percent.................................... 17.6% 18.8% (1.2%)
CBIZ MMP revenue increased by $11.5 million, or 15.1%, for twelve months
ended December 31, 2004 as compared to the twelve months ended December 31,
2003. Approximately $4.2 million of the growth was attributable to new clients
obtained during 2004. The remaining revenue growth was the result of the
maturation of clients obtained in 2003 and strong existing client sales.
The largest components of operating expenses for CBIZ MMP are personnel
costs, occupancy costs and office expenses (primarily postage), representing
88.9% and 90.0% of total operating expenses for the years ended December 31,
2004 and 2003, respectively. Personnel costs increased by $7.7 million to 58.9%
of revenue for the year ended December 31, 2004, from 57.6% of revenue for the
year ended December 31, 2003. This increase was directly related to an increase
in the number of client service staff employed by MMP during 2004 verses 2003,
required to support the growth in revenue. Additionally, MMP added personnel in
compliance and technology to support the current infrastructure and to position
the unit for continued growth in the future. Occupancy costs as a percentage of
revenue were 6.7% and 7.2%, for the years ended December 31, 2004 and 2003,
respectively. Office expenses as a percentage of revenue were 7.6% and 8.3%, for
the years ended December 31, 2004 and 2003, respectively.
Gross margin has declined in 2004 from a year ago, primarily as a result of
investments made in additional staff to support and facilitate growth. CBIZ
expects operating expenses to increase in 2005 based on significant investments
to upgrade their operating system to allow for future growth. As a result of
these investments, gross margin is expected to remain consistent with 2004;
however, gross margin as a percentage of revenue will decline slightly in 2005.
National Practice Services - Other
2004 2003 CHANGE
------- ------- ------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit............................................ $69,609 $66,844 $2,765
Acquired businesses.................................. 1,870 -- 1,870
Divested operations.................................. -- 2,446 (2,446)
------- ------- ------
Total revenue..................................... $71,479 $69,290 $2,189
Percent of total CBIZ revenue.......................... 13.7% 13.6%
Operating expenses..................................... 65,293 69,516 (4,223)
------- ------- ------
Gross margin........................................... $ 6,186 $ (226) $6,412
======= ======= ======
Gross margin percent................................... 8.7% (0.3%) 9.0%
On a same-unit basis, the National Practices group, excluding CBIZ MMP,
experienced higher revenues of $2.8 million for the year ended December 31, 2004
as compared to the year ended December 31, 2003.
22
Approximately $2.1 million of the same-unit revenue growth was attributable to
four transactions that closed during the first six months of 2004 in CBIZ's
mergers and acquisition business. The remainder of the increase was primarily
from our payroll processing unit and valuation business. The payroll processing
unit made investments in their business processes and systems during 2003 to
position the unit for growth. These investments, along with the increased client
satisfaction (evidenced by lower than anticipated attrition rate), have resulted
in favorable revenue results in 2004 as compared to 2003. This increase was
offset by lower revenues in CBIZ's technology, health care consulting and
property tax businesses in 2004. Revenue from acquired businesses relates to the
technology business located in Cleveland, OH, which CBIZ acquired in June 2004.
Revenue from divested operations relates to the closure of unprofitable
locations in the property tax and technology businesses during 2003.
The largest components of operating expenses for the National Practices
Services - Other segment are personnel costs, direct costs and occupancy costs,
representing 87.6% and 87.9% of total operating expenses in 2004 and 2003,
respectively. Personnel costs decreased by $3.1 million, and decreased as a
percentage of revenue to 63.3% for the year ended December 31, 2004, from 69.8%
for the year ended December 31, 2003. The decrease is primarily as a result of
reduction of personnel related to the closure of unprofitable locations in the
mergers and acquisitions group. Direct costs primarily consist of product costs
associated with hardware sales in the technology businesses. These costs have
decreased by $0.5 million, and have decreased as a percentage of revenue to 9.9%
for the year ended December 31, 2004, from 11.0% for the year ended December 31,
2003. The decrease is primarily a result of lower product costs at our
technology division due to the closure of unprofitable locations during 2003.
Occupancy costs are typically fixed in nature and have decreased as a percentage
of revenue to 6.8% in 2004 from 7.3% in 2003, primarily as a result of the
shutdown of unprofitable facilities in the property tax and technology
businesses described above.
The improvement in gross margin for the year ended December 31, 2004 from
the year ended December 31, 2003 was realized as the result of closing
unprofitable locations in the property tax and technology businesses and
discontinuing unprofitable product lines, combined with the four mergers and
acquisitions transactions as previously discussed, and improvements and
operational efficiencies in the payroll, technology and valuation businesses.
Due to the unpredictable nature of the mergers and acquisitions business, CBIZ
expects gross margin for 2005 to be in line with 2004 levels.
Revenue
Total revenue for the year ended December 31, 2004 was $520.1 million as
compared to $506.8 million for the year ended December 31, 2003, representing an
increase of $13.3 million, or 2.6%. The increase in revenue attributable to
acquisitions completed subsequent to December 31, 2003 was $9.5 million, and was
offset by a decrease in revenue of $10.3 million due to divested operations
completed subsequent to December 31, 2003. For business units with comparable
periods of operations for the years ended December 31, 2004 and 2003, revenue
increased $14.1 million or 2.8%. A more comprehensive analysis of revenue by
each operating practice group is discussed above.
Expenses
Operating expenses increased to $459.4 million for the year ended December
31, 2004, from $441.7 million for the comparable period in 2003, an increase of
$17.7 million or 4.0%. As a percent of revenue, operating expenses (excluding
consolidation and integration charges) were 87.8% and 86.8% for the years ended
December 31, 2004 and 2003, respectively. The primary components of operating
expenses are personnel costs and occupancy expense, representing 79.9% and 80.1%
of total operating expenses and 70.6% and 69.8% of revenue for the years ended
December 31, 2004 and 2003, respectively. A more comprehensive analysis of
operating expenses (excluding consolidation and integration charges) and their
impact on gross margin is discussed by operating practice group, above.
Consolidation and integration charges are reported as operating expenses in
the accompanying consolidated statements of operations, and increased as a
percent of revenue to 0.5% from 0.4% for the years ended
23
December 31, 2004 and 2003, respectively. The increase in consolidation and
integration charges was due primarily to real estate leasing costs in the
Chicago market during 2004.
Corporate general and administrative expenses increased to $24.8 million
and 4.7% of revenue for the year ended December 31, 2004, from $19.5 million and
3.9% of revenue for the comparable period in 2003. The increase in 2004 over
2003 was primarily the result of an increase in legal expenses, settlements (net
of recoveries), and litigation reserves of approximately $3.2 million, to
address several long-standing litigation issues. Additionally, CBIZ incurred
approximately $1.0 million in expenses during 2004 associated with its
compliance efforts in connection with Section 404 of the Sarbanes-Oxley Act of
2002.
Depreciation and amortization expense decreased to $16.4 million for the
year ended December 31, 2004, from $17.1 million for the comparable period in
2003, a decrease of $0.7 million, or 3.9%. The decrease is primarily
attributable to the shift from purchasing computer-related items and furniture
to leasing such items. These operating lease costs are recorded as operating
expenses, rather than capitalized and recorded as depreciation, and total $2.6
million for the year ended December 31, 2004 and $1.7 million for the year ended
December 31, 2003. As a percentage of total revenue, depreciation and
amortization expense was 3.2% for the year ended December 31, 2004, compared to
3.4% for the comparable period in 2003.
Interest expense increased to $1.5 million for the year ended December 31,
2004, from $1.1 million for the comparable period in 2003, an increase of $0.5
million, or 42.8%. The increase is the result of higher average debt during the
year ended December 31, 2004, of $40.9 million, compared to $18.2 million during
the year ended December 31, 2003. Higher debt during 2004 is primarily due to
share repurchase activity and is further described under "Liquidity and Capital
Resources". The increase in interest expense due to higher average debt balances
was offset by a decrease in average interest rates to 3.5% for the year ended
December 31, 2004 from 4.4% for the year ended December 31, 2003. Additionally,
interest expense for year ended December 31, 2003 included fees related to an
interest rate swap that was terminated during the second quarter of 2003.
Gain on sale of operations, net was $1.0 million for the year ended
December 31, 2004, and was related to the sale of two operations and three
client lists in the ATA practice group, and a client list in the B&I practice
group. For the year ended December 31, 2003, gain on sale of operations, net was
$2.5 million and related primarily to the sale of Health Administrative Services
(HAS) from the B&I practice group. Three businesses from the ATA practice group
were also sold during the year ended December 31, 2003. See Note 17 to the
consolidated financial statement included herewith, for further discussion. In
addition to this divestiture activity, CBIZ classified three operations as
discontinued businesses in 2004, and five operations as discontinued businesses
in 2003. The results of these operations are disclosed separately in the
consolidated financial statements included herewith, and are discussed
separately under "Results of Operations - Discontinued Businesses," below.
CBIZ reported other income of $3.6 million for the year ended December 31,
2004, compared to other expense of $1.2 million for the comparable period in
2003, an increase $4.8 million. Other income (expense), net is comprised
primarily of interest income earned on funds held for clients at CBIZ's payroll
business, adjustments to the fair value of assets held in a rabbi trust related
to the deferred compensation plan implemented in the first quarter of 2004,
gains and losses on sale of assets, and miscellaneous income such as contingent
royalties from previous divestitures. The change in other income (expense) for
the year ended December 31, 2004 from the year ended December 31, 2003 is
primarily related to $2.8 million of impairment charges to notes receivable
during the year ended December 31, 2003 that did not recur in 2004. Of those
impairment charges, $2.4 million related to the impairment of a note taken in
connection with the divestiture of the hazardous waste operation in 1997, that
filed bankruptcy in 2003. Additionally, other income for the year ended December
31, 2004 includes approximately $0.4 million of interest income related to a tax
refund that is discussed in further detail below, and approximately $0.4 million
related to the deferred compensation plan that was implemented during the first
quarter of 2004.
CBIZ recorded income taxes from continuing operations of $5.7 million for
the year ended December 31, 2004, compared to $12.5 million for the year ended
December 31, 2003. The effective tax rate decreased to 25.3% for the year ended
December 31, 2004, from 43.4% for the comparable period in 2003. The effective
tax rate for the year ended December 31, 2004 is lower than statutory federal
and state tax rates of approximately
24
40.0% due to a $3.5 million tax benefit related to a favorable tax position
which was successfully resolved upon completion of the Internal Revenue Service
examination for the years ended December 31, 1998, 1999, and 2000. The effective
tax rate for the year ended December 31, 2003 was higher than the statutory
federal and state tax rates of approximately 40.0%, primarily due to capital
losses resulting from certain impairment charges that were not offset by capital
gains and were not deductible in the period.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002
Operating Practice Groups
CBIZ currently delivers products and services through three practice
groups. A brief description of these groups' operating results and factors
affecting their businesses is provided below. The services offered under each of
these groups are described in Part I of this report.
Accounting, Tax and Advisory Services.
2003 2002 CHANGE
-------- -------- -------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit.......................................... $198,003 $201,038 $(3,035)
Acquired businesses................................ 1,609 -- 1,609
Divested operations................................ -- 1,698 (1,698)
-------- -------- -------
Total revenue................................... $199,612 $202,736 $(3,124)
Percent of total CBIZ revenue........................ 39.4% 41.1%
Operating expenses................................... 174,452 174,901 (449)
-------- -------- -------
Gross margin......................................... $ 25,160 $ 27,835 $(2,675)
======== ======== =======
Gross margin percent................................. 12.6% 13.7% (1.1%)
Same-unit revenue decreased by $3.0 million primarily due to a transfer of
certain technology businesses from ATA to National Practices in January 2003,
which resulted in a decrease in revenue of $5.1 million. Excluding the impact of
such transfers, same-unit revenue increased $2.1 million or 1.1% primarily due
to price increases. The impact of the price increases was offset by a decrease
in the number of hours charged to clients at a few of our units. Acquired
businesses in 2003 represent a firm in Orange County, California and the
acquisition of HarborView in September 2003, which provides Sarbanes-Oxley
consulting services. Divested operations represent several smaller units that
did not provide opportunity for growth and cross-serving capabilities.
The largest components of operating expenses for the ATA group are
personnel costs, occupancy costs and professional service fees paid to third
parties, representing 87.3% and 87.2% of total operating expenses for the years
ended December 31, 2003 and 2002, respectively. As a percentage of revenue,
personnel costs were 68.2% and 67.2% for the years ended December 31, 2003 and
2002, respectively. Occupancy costs are generally fixed in nature, and were 7.3%
and 7.4% of revenue for the years ended December 31, 2003 and 2002,
respectively. Professional service fees paid to third parties increased to 0.8%
percent of revenue for the year ended December 31, 2003 from 0.6% for year ended
December 31, 2002, as the result of outsourced professional services utilized at
units with same-unit revenue growth and for CBIZ HarborView for Sarbanes-Oxley
consulting services that were initiated in 2003.
The decline in gross margin for the year ended December 31, 2003 from
December 31, 2002 was primarily due to compensation and benefits costs that rose
at a rate higher than revenue.
25
Benefits & Insurance Services
2003 2002 CHANGE
-------- -------- -------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit......................................... $154,660 $142,878 $11,782
Acquired businesses............................... 7,435 -- 7,435
Divested operations............................... -- 7,636 (7,636)
-------- -------- -------
Total revenue.................................. $162,095 $150,514 $11,581
Percent of total CBIZ revenue....................... 32.0% 30.5%
Operating expenses.................................. 128,407 123,369 5,038
-------- -------- -------
Gross margin........................................ $ 33,688 $ 27,145 $ 6,543
======== ======== =======
Gross margin percent................................ 20.8% 18.0% 2.8%
On a same-unit basis, the B&I group experienced an increase in revenue of
8.2% for the year ended December 31, 2003 from the year ended December 31, 2002.
The increase in revenue was attributable to organic growth in both the retail
and national services divisions, as well as an increase in supplemental
commissions from insurance carriers. The worksite marketing business experienced
significant revenue growth due to new clients obtained in 2003. The life
insurance business also experienced revenue growth through the sale of several
large life cases and special risk insurance cases, combined with bank-owned life
insurance placements related to one major carrier. The increase in revenue from
acquired businesses pertains to business units providing group benefits and
property and casualty services in the Salt Lake City, Maryland and southern
Florida markets. The decline in revenue from divested operations relates to
Health Administration Services, which was sold in May 2003.
The largest components of operating costs for the B&I group are personnel
costs, commissions paid to third party brokers, and occupancy costs,
representing 83.8% and 83.3% of total operating expenses in 2003 and 2002,
respectively. Personnel costs decreased as a percentage of revenue to 53.7% from
56.1%, primarily due to the revenue growth experienced in 2003. Commissions paid
to third party brokers increased to 6.8% from 5.9% for the years ended December
31, 2003 and 2002, respectively, primarily due to a higher portion of revenue
being generated with third party brokers, particularly at the special risk
insurance and bank-owned life insurance businesses. Occupancy expenses declined
as a percentage of revenue to 5.9% in 2003 from 6.3% in 2002, due to the revenue
growth previously discussed.
The improvement in gross margin in 2003 over 2002 was primarily the result
of increases in group benefit premium rates. In addition, the number of life
insurance cases that closed in 2003 contributed to margin improvement, as these
cases generally experience higher margins than traditional group health and
property and casualty products.
National Practices Services. The National Practices group contributed
approximately $145.1 million and $139.7 million of revenue, or approximately
28.6% and 28.3% of CBIZ's total revenue for the years ended December 31, 2003
and 2002, respectively.
26
CBIZ Medical Management Professionals (CBIZ MMP)
2003 2002 CHANGE
------- ------- ------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit.............................................. $75,785 $66,156 $9,629
Acquired businesses.................................... -- -- --
Divested operations.................................... -- -- --
------- ------- ------
Total revenue....................................... $75,785 $66,156 $9,629
Percent of Total CBIZ revenue............................ 15.0% 13.4%
Operating expenses....................................... 61,566 54,481 7,085
------- ------- ------
Gross margin............................................. $14,219 $11,675 $2,544
======= ======= ======
Gross margin percent..................................... 18.8% 17.6% 1.2%
CBIZ MMP's revenue growth of 14.5% was attributable to the addition of new
clients, and expansion into new markets (such as the entrance into the Colorado
market). Revenue for CBIZ MMP is based on a percentage of amounts collected for
their clients.
The largest components of operating expenses for CBIZ MMP are personnel
costs, occupancy costs and office expenses (primarily postage), which
represented 90.0% and 90.6% of total operating expenses for the years ended
December 31, 2003 and 2002, respectively. Personnel costs increased by $5.2
million but decreased as a percentage of revenue to 57.6% from 58.2%, for the
years ended December 31, 2003 and 2002, respectively. The increase in personnel
costs was directly related to an increase in staffing levels to support revenue
growth. Personnel costs decreased as a percentage of revenue primarily due to
the revenue growth as previously discussed. Occupancy costs as a percentage of
revenue were 7.2% and 7.3%, for the years ended December 31, 2003 and 2002,
respectively. Occupancy costs as a percent of revenue remained consistent in
2003 from 2002 despite the growth in revenue, due to additional costs incurred
in connection with our expansion into new markets as discussed above. Office
expenses declined as a percentage of revenue to 8.3% in 2003 from 9.1% in 2002,
primarily as a result of the growth in revenue.
The improvement in gross margin for the year ended December 31, 2003 from
2002, was primarily due to efficiencies gained by CBIZ MMP as the result of
investments made in systems and new technologies.
National Practices -- Other
2003 2002 CHANGE
------- ------- -------
(DOLLARS IN THOUSANDS)
Revenue
Same-unit.............................................. $69,290 $73,549 $(4,259)
Acquired businesses.................................... -- -- --
Divested operations.................................... -- -- --
------- ------- -------
Total revenue....................................... $69,290 $73,549 $(4,259)
Percent of total CBIZ revenue............................ 13.6% 15.0%
Operating expenses....................................... 69,516 72,302 (2,786)
------- ------- -------
Gross margin............................................. $ (226) $ 1,247 $(1,473)
======= ======= =======
Gross margin percent..................................... (0.3%) 1.7% (2.0%)
On a same-unit basis, the National Practices group, excluding CBIZ MMP
experienced lower revenues in 2003 as compared to 2002. The majority of the
decrease in revenue was related to the lack of transactions in CBIZ's Mergers
and Acquisition Group (CBIZ M&A), as compared to 2002, in which one significant
transaction closed in the fourth quarter. In addition to the decrease in CBIZ
M&A's revenue, the valuation, property tax and
27
information technology (IT) businesses suffered from decreased revenue in 2003
primarily due to rationalization of certain unproductive offices and business
lines.
The largest components of operating expenses for the National Practices
Services - Other segment are personnel costs, direct costs and occupancy costs,
representing 87.9% and 85.4% of total operating expenses in 2003 and 2002,
respectively. Personnel costs as a percentage of revenue were 69.8% and 64.0%
for the years ended December 31, 2003 and 2002, respectively. The increase in
personnel costs as a percentage of revenue was directly related to the decrease
in revenue in 2003 from 2002. Direct costs primarily consist of product costs
associated with hardware sales in the technology businesses, and were 11.0% and
13.2% of revenue for the years ended December 31, 2003, and 2002, respectively.
Occupancy costs are typically fixed in nature and were 7.3% and 6.8% of revenue
for the years ended December 31, 2003, and 2002, respectively. Occupancy costs
increased as a percentage of revenue, as a result of the decline in revenue as
previously discussed.
The decline in gross margins for the year ended December 31, 2003 from
December 31, 2002 was primarily due to certain unproductive offices and product
lines within the property tax, mergers and acquisitions, and IT businesses, and
the lack of transactions in CBIZ's Mergers and Acquisition Group in 2003 as
compared to 2002.
Revenues
Total revenue for the year ended December 31, 2003 was $506.8 million as
compared to $493.0 million for the year ended December 31, 2002, representing an
increase of $13.8 million, or 2.7 %. The increase in revenue attributable to
acquisitions completed during the year ended December 31, 2003 was $9.0 million,
offset by decreases in revenue attributable to divested operations of $9.3
million. For business units with comparable periods of operations for the years
ended December 31, 2003 and 2002, revenue increased $14.1 million or 2.9%. A
more comprehensive analysis of revenue is discussed by each operating practice
group, above.
Expenses
Operating expenses increased to $441.7 million for the year ended December
31, 2003, from $434.4 million for the comparable period in 2002, representing an
increase of $7.3 million. As a percent of revenue, operating expenses (excluding
consolidation and integration charges), were 86.8% and 87.4%, for the years
ended December 31, 2003 and 2002, respectively. The primary components of
operating expenses were personnel costs and occupancy expense, representing
80.1% and 79.2% of total operating expenses and 69.8% of revenue for the years
ended December 31, 2003 and 2002, respectively. A more comprehensive analysis of
operating expenses (excluding consolidation and integration charges) and their
impact on gross margin is discussed by operating practice group, above.
Consolidation and integration charges are reported as operating expenses in
the consolidated statements of operations and are discussed more fully in Note 9
to the consolidated financial statements included herewith. Consolidation and
integration charges decreased as a percent of revenue to 0.4% from 0.7% for the
years ended December 31, 2003 and 2002, respectively. Consolidation and
integration charges were higher in 2002, primarily as the result of $1.7 million
of costs recognized during 2002 for consolidation activities in the Kansas City
market, related to non-cancelable lease obligations.
Corporate general and administrative expenses increased slightly to $19.5
million from $19.2 million for the years ended December 31, 2003, and 2002,
respectively. While total costs remained relatively flat, compensation expenses
increased in 2003, primarily due to $0.7 million of severance expense.
Expenditures for legal costs to pursue cases concerning non-competition
violations by former employees, insurance coverage issues, and other cases in
which CBIZ was involved, decreased approximately $1.4 million. Corporate general
and administrative expenses represented 3.8% of total revenues for the year
ended December 31, 2003, compared to 3.9 % for the comparable period in 2002.
Depreciation and amortization expense decreased to $17.1 million for the
year ended December 31, 2003, from $20.4 million for the comparable period in
2002, representing a decrease of $3.3 million, or 16.2%. The decrease primarily
related to dispositions and assets that became fully depreciated, offset by
increases related to additional capital expenditures made since December 31,
2002. In addition, approximately $0.9 million of the
28
decrease was directly related to the shift from purchasing certain assets to
leasing assets, which are recorded as operating leases in operating expense. As
a percentage of revenue, depreciation and amortization expense decreased to 3.4%
for the year ended December 31, 2003 from 4.1% for the comparable period in
2002.
Interest expense decreased to $1.1 million for the year ended December 31,
2003, from $2.5 million for the comparable period in 2002, a decrease of $1.4
million, or 57.4%. The decrease was the result of both lower average outstanding
debt balances and a lower average interest rate in 2003. The average debt
balance was $18.2 million for the year ended December 31, 2003 compared to $38.6
million for the year ended December 31, 2002. The weighted average interest rate
on bank debt was 4.4% for the year ended December 31, 2003 compared to 5.6% for
the same period in 2002.
CBIZ recorded a net gain from divested operations of $2.5 million for the
year ended December 31, 2003, as compared to a net gain of $0.9 million for the
year ended December 31, 2002. CBIZ completed the divestiture of six non-core
business operations during the year ended December 31, 2003, either through sale
or closure. During 2002, the net gain was attributable to the divestiture of
eleven non-core operations. In addition to this divestiture activity, CBIZ
classified five operations as discontinued operations during 2003 and 2002,
respectively, in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144)." The results of these operations are disclosed separately in the
consolidated financial statements and discussed separately under "Results of
Operations -- Discontinued Businesses," below.
Other expense, net was $1.2 million and $1.6 million for the years ended
December 31, 2003 and 2002, respectively. Other expense, net is comprised
primarily of interest income earned in CBIZ's payroll business, gains and losses
on the sale of assets, and miscellaneous income such as contingent royalties
from previous divestitures. For 2003, other income was offset by $2.8 million of
impairment charges, of which $2.4 million related to the impairment of a note
taken in connection with the divestiture of the hazardous waste operation in
1997, that filed bankruptcy in 2003. For 2002, other income was offset by $2.4
million of charges related to the write-down of CBIZ's investment in two
high-tech start-up ventures, including $0.8 million impairment charge related to
the note previously discussed. In addition, interest income decreased $0.4
million related to lower interest rates in 2003.
CBIZ recorded income tax expense from continuing operations of $12.5
million for the year ended December 31, 2003, compared with $8.2 million in
2002. The effective tax rate was 43.4% for the year ended December 31, 2003. The
effective tax rate for the year ended December 31, 2003, is higher than the
statutory federal and state tax rates of approximately 40% primarily due to
differences such as the establishment of a valuation allowance related to asset
impairment charges, portions of certain meal and entertainment expenses that are
not fully deductible for tax purposes, and tax credit carryforwards.
RESULTS OF OPERATIONS -- DISCONTINUED BUSINESSES
During the years ended December 31, 2004, 2003 and 2002, CBIZ divested of
three, six and five business operations, respectively, which were no longer part
of CBIZ's strategic long-term growth objectives. One business unit was available
for sale at December 31, 2002, and was sold in 2003. There were no businesses
available for sale at December 31, 2004 or 2003.
These operations qualified for treatment as discontinued businesses, and
have been classified as such in accordance with Statement of Financial
Accounting Standards (SFAS) 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Accordingly, the net assets, liabilities, and results of
operations of these businesses are reported separately in the consolidated
financial statements included herewith. Based upon the sales proceeds and costs
of closure, CBIZ recorded a gain on disposal of discontinued businesses, net of
tax, of $0.1 million and $0.7 million for the years ended December 31, 2004 and
2003, respectively and a loss of $2.5 million for the year ended December 31,
2002. Revenue associated with discontinued businesses for the years ended
December 31, 2004, 2003 and 2002 was $3.4 million, $12.5 million and $18.6
million, respectively. The loss from operations of these discontinued
businesses, net of tax, for the years ended December 31, 2004, 2003 and 2002 was
$0.9 million, $1.7 million and $2.1 million respectively.
29
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 in the amount of $80.0,
net of a tax benefit of $8.6 million.
FINANCIAL CONDITION
Total assets were $413.8 million, total liabilities were $167.3 million and
shareholders equity was $246.5 million as of December 31, 2004. Current assets
of $184.0 million exceeded current liabilities of $106.1 million by $77.9
million.
Cash and cash equivalents increased $1.5 million to $5.3 million for the
year ended December 31, 2004. Restricted cash was $10.1 million at December 31,
2004, a decrease of $0.8 million from December 31, 2003. Restricted cash
represents those funds held in connection with CBIZ's securities regulated
operations and funds held in connection with the pass through of insurance
premiums to the carrier. Cash and restricted cash fluctuate during the year
based on the timing of cash receipts and related payments.
Accounts receivable, net were $109.7 million at December 31, 2004, an
increase of $0.3 million from December 31, 2003. The increase in accounts
receivable is attributed to the increase in revenue from internal growth and
acquisitions, offset by an improvement in collections from a year ago. Days
sales outstanding (DSO), from continuing operations, which are calculated based
on gross accounts receivable balance at the end of the period divided by daily
revenue, decreased from 81 days at December 31, 2003 to 79 days at December 31,
2004. CBIZ provides DSO data because such data is commonly used as a performance
measure by analysts and investors and as a measure of the Company's ability to
collect on receivables in a timely manner.
Goodwill and other intangible assets, net of accumulated amortization,
increased $5.4 million from December 31, 2003. Acquisitions, including
contingent consideration earned, resulted in a $8.0 million increase in goodwill
and other intangible assets during 2004. In addition, goodwill and other
intangible assets decreased by $2.6 million as a result of divestitures
completed during the year ended December 31, 2004, and amortization expense for
client lists and other intangibles. See further discussion in Note 5 to the
consolidated financial statements included herewith.
The increase in income taxes recoverable to $7.1 million at December 31,
2004, is related to a favorable tax position which was successfully resolved
upon completion of the IRS examination of prior year tax provisions, and is
further discussed in Note 6 to the consolidated financial statements included
herewith. In addition, CBIZ is due approximately $0.4 million in interest in
relation to the aforementioned tax position, which is recorded as other current
assets in the accompanying consolidated balance sheet at December 31, 2004. The
overall increase in other current assets of $0.5 million from December 31, 2003
is primarily attributable to this interest receivable.
CBIZ implemented a deferred compensation plan in the first quarter of 2004.
Assets of the plan are held in a rabbi trust, and are directly offset by
liabilities of the plan. The plan is discussed in further detail in Note 10 of
the consolidated financial statements included herewith.
As further described in Note 1 to the accompanying consolidated financial
statements, funds held for clients are directly offset by client fund
obligations. Funds held for clients fluctuate during the year based on the
timing of cash receipts and related payments.
The accounts payable balance of $25.9 million at December 31, 2004 reflects
amounts due to suppliers and vendors; balances fluctuate during the year based
on the timing of cash payments. Accrued personnel costs represent amounts due
for payroll, payroll taxes, employee benefits and incentive compensation;
balances
30
fluctuate during the year based on the timing of payments and our estimate of
incentive compensation costs, which is described more fully under "Estimates of
Incentive Compensation Costs and Effective Income Tax Rates, below". Other
current liabilities increased $4.1 million to $17.2 million at December 31,2004,
primarily as the result of an increase in unearned revenue from a year ago,
which relates primarily to our Valuation and Property Tax business, and set up
and license fees related to flexible benefits services provided by our ATA
practice group. See further discussion under "Revenue Recognition and Valuation
of Unbilled Revenues," below. The increase in other current liabilities at
December 31, 2004 from December 31, 2003 was also a result of acquisition
activity, costs related to client service related obligations, and capitalized
lease obligations in connection with consolidation activities in Kansas City.
These increases were offset by a decrease in our consolidation and integration
reserve which is described in Note 9 to the consolidated financial statements
included herewith.
Bank debt for amounts due on CBIZ's credit facility increased by $39.9
million to $53.9 million at December 31, 2004 from December 31, 2003, primarily
as a result of stock repurchases made during 2004. Other non-current liabilities
increased $1.1 million primarily due to capitalized lease obligations in
connection with consolidation activities in Kansas City.
Stockholders' equity decreased $31.3 million in 2004 from 2003, primarily
due to CBIZ repurchasing 10.4 million shares of its common stock for a total
cost (including expenses) of $50.4 million (7.5 million shares were purchased in
a tender offer and the remaining 2.9 million shares were repurchased in the open
market). Funds used to purchase shares were provided by cash flow generated from
CBIZ's operations, as well as borrowings under CBIZ's credit facility. The
decrease in stockholders' equity resulting from the share repurchases was offset
by net income of $16.1 million earned for the year ended December 31, 2004, and
$1.7 million related to the exercise of stock options.
LIQUIDITY AND CAPITAL RESOURCES
CBIZ's principal source of net operating cash is derived from the
collection of fees and commissions from professional services rendered to its
clients. In addition, CBIZ supplements net operating cash with a senior secured
credit facility. The $100.0 million facility carries an option to increase the
commitment to $125.0 million and allows for the allocation of funds for
strategic initiatives, including acquisitions and the repurchase of CBIZ stock.
The primary use of the credit facility is for working capital, expansion and
continued improvement of new and existing service offerings, and business
acquisitions. The facility has a five year term with an expiration date of
August 2009. The credit facility is secured by substantially all assets and
capital stock of CBIZ and its subsidiaries. Under the credit facility, CBIZ is
required to meet certain financial covenants with respect to (i) minimum net
worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage
ratio. CBIZ was in compliance with its covenants as of December 31, 2004 and
projects that it will remain in compliance during 2005.
At December 31, 2004, CBIZ had $53.9 million outstanding under its credit
facility, and $4.2 million in letters of credit outstanding. Available funds
under the facility based on the terms of the commitment were approximately $17.4
million at December 31, 2004. Management believes the available funds from the
credit facility, along with cash generated from operations provides CBIZ the
financial resources needed to meet business requirements for the next twelve
months, including capital expenditures, working capital requirements, and
strategic investments. See Note 7 to CBIZ's consolidated financial statements
included herewith.
CBIZ may also obtain funding by offering securities or debt, through the
public markets or private markets. CBIZ currently has a number of shelf
registrations active, under which it can offer such securities. See Note 11 to
the consolidated financial statements contained herein for a description of the
aforementioned registration filings.
SOURCES AND USES OF CASH
Cash provided by operating activities represents net income adjusted for
certain non-cash items and changes in assets and liabilities. During 2004, cash
provided by operating activities was $20.4 million compared to $39.9 million in
2003. The majority of the decrease in cash provided by operating activities in
2004 was due to an increase in income taxes of approximately $10.8 million. The
increase in income taxes is attributed to deferred
31
tax assets utilized in 2003 in connection with the divestiture of two non-core
business units. The remaining decrease in cash provided by operating activities
is due to an increase in net cash used toward discontinued operations of $7.3
million.
Net cash provided by operating activities in 2003 was $39.9 million versus
$42.3 million in 2002, a decrease of $2.4 million. The decrease in 2003 is due
to an increase in cash used toward working capital of $8.3 million, offset by an
increase in net income adjusted for certain non-cash items of $3.4 million and
an increase in cash provided by discontinued operation of $2.5 million.
Cash flows from investing activities consist primarily of payments toward
capital expenditures and business acquisitions, proceeds from divested
operations and the collection of notes receivable. CBIZ used $9.3 million in net
cash for investing activities during 2004, compared to $5.5 million during 2003.
The increase in cash used in investing activities during 2004 resulted from an
increase in business acquisitions of $1.8 million along with reductions in
proceeds from divested operations of $2.6 million and the net change in notes
receivable of $1.6 million. Net additions to property and equipment were $8.4
million and $10.6 million in 2004 and 2003, respectively, reflecting a lower
investment in 2004 of $2.2 million. Capital expenditures primarily consisted of
leasehold improvements and equipment in connection with the consolidation of
certain offices, IT capital to support future growth in the benefits and
insurance, medical practice management, property tax and flexible spending
service offerings, and equipment purchases in relation to normal replacement.
CBIZ used $5.5 million in net cash for investing activities during 2003,
compared to $3.0 million during 2002. The increase in cash used in investing
activities during 2003 primarily resulted from a reduction in proceeds from
discontinued operations of $3.0 million. Proceeds from divestitures increased
$2.5 million while investment in business acquisitions decreased $0.7 million,
offsetting the net uses of cash. Net additions to property and equipment were
$10.6 million and $8.1 million in 2003 and 2002, respectively, reflecting a
higher investment in 2003 of $2.5 million. Capital expenditures primarily
consisted of continued expenditures toward leasehold improvements and equipment
in connection with the consolidation of certain offices, IT capital of
internally developed software to support cross selling initiatives, growth in
the medical practice management unit and equipment purchases in relation to
normal replacement.
Cash flows from financing activities consist primarily of repurchases of
common stock, net borrowing activity from the credit facility, payments toward
notes payable and capitalized leases, and proceeds from the exercise of stock
options. CBIZ used $9.6 million in net cash for financing activities in 2004
compared to $36.9 million in 2003. During 2004 we purchased 10.4 million shares
of common stock for $50.4 million, compared to the purchase of 10.0 million
shares of common stock for $33.6 million in 2003. Financing sources of cash
during 2004 were primarily $39.9 million in net proceeds from the credit
facility compared to $3.5 million of net payments in 2003, and $1.4 million in
proceeds from the exercise of stock options compared to $0.9 million in 2003.
CBIZ used $36.9 million in net cash for financing activities in 2003
compared to $37.3 million in 2002. During 2003, the company purchased 10.0
million shares of its common stock for $33.6 million. Financing uses of cash
during 2003 also included $3.5 million of net payments toward the credit
facility versus $37.5 million in
32
2002. CBIZ's aggregate amount of future obligations for the next five years and
thereafter is set forth below (in thousands):
TOTAL 2005 2006 2007 2008 2009 THEREAFTER
-------- ------- ------- ------- ------- ------- ----------
ON-BALANCE SHEET
Bank debt........................ $ 53,900 $ -- $ -- $ -- $ -- $53,900 $ --
Notes payable and capitalized
leases......................... 4,530 3,032 437 413 639 9 --
Non-cancelable operating lease
obligations.................... 177,923 30,036 25,515 21,427 18,884 15,524 66,537
Restructuring lease
obligations(1)................. 8,901 2,278 2,182 2,109 1,438 717 177
OFF-BALANCE SHEET
Letters of credit................ 2,863 2,813 -- -- -- -- 50
Performance guarantees for non-
consolidated affiliates........ 1,317 1,317 -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total............................ $249,434 $39,476 $28,134 $23,949 $20,961 $70,150 $66,764
======== ======= ======= ======= ======= ======= =======
- ---------------
(1) Excludes cash payments for subleases.
OFF-BALANCE SHEET ARRANGEMENTS
CBIZ maintains administrative service agreements with independent CPA
firms, as described more fully under the "Business Services" section of Items 1
and 2, Business and Properties. These CPA firms qualify as variable interest
entities under FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities," as amended. The impact to CBIZ of this accounting
pronouncement is not material to the financial condition, results of operations
or cash flows of CBIZ, and is further discussed in Note 1 of the consolidated
financial statements included herewith.
CBIZ provided guarantees of performance obligations for a CPA firm with
which CBIZ maintains an administrative services agreement. Potential obligations
under the guarantees totaled $1.3 million and $0.7 million at December 31, 2004
and 2003, respectively. CBIZ expects the guarantees to expire without the need
to advance any cash. In accordance with FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", as amended, CBIZ has recognized
a liability for the fair value of the obligation undertaken in issuing these
guarantees. The liability is recorded as other current liabilities in the
accompanying consolidated balance sheets.
CBIZ provides letters of credit to landlords (lessors) of its leased
premises in lieu of security deposits. Letters of credit under our facility at
December 31, 2004 and 2003 were $2.9 million and $3.2 million, respectively.
CBIZ has various agreements in which we may be obligated to indemnify the
other party with respect to certain matters. Generally, these indemnification
clauses are included in contracts arising in the normal course of business under
which we customarily agree to hold the other party harmless against losses
arising from a breach of representations, warranties, covenants or agreements,
related to such matters as title to assets sold and certain tax matters. It is
not possible to predict the maximum potential amount of future payments under
these indemnification agreements due to the conditional nature of our
obligations and the unique facts of each particular agreement. Historically,
payments made by us under these agreements have not been material. As of
December 31, 2004, we were not aware of any indemnification agreements that
would require material payments.
INTEREST RATE RISK MANAGEMENT
CBIZ has used interest rate swaps to manage the interest rate mix of its
credit facility and related overall cost of borrowing. Interest rate swaps
involve the exchange of floating for fixed rate interest payments to effectively
convert floating rate debt into fixed rate debt based on a one, three, or
six-month U.S. dollar LIBOR. Interest rate swaps allow CBIZ to maintain a target
range of fixed to floating rate debt. During June 2003, CBIZ paid its
33
revolving credit facility balance down to zero, thus requiring it to terminate
its interest rate swap. The interest rate swap was scheduled to expire during
August 2003 and carried a fixed rate of 5.58% (fixed Libor rate of 3.58% plus an
applicable margin of 2.0%). During 2004, management did not utilize interest
rate swaps. Management will continue to evaluate the potential use of interest
rate swaps as it deems appropriate under certain operating and market
conditions.
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 Generally
Accepted Accounting Principles (GAAP) and SEC Staff Accounting Bulletin No. 104
(SAB 104). CBIZ offers a vast array of products and business services to its
clients. Those services are delivered through three practice groups. A
description of revenue recognition, as it relates to those groups, is provided
below.
Certain of our client arrangements encompass multiple deliverables. CBIZ
accounts for these arrangements in accordance with Emerging Issues Task Force
No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables"
(EITF 00-21). If the deliverables meet the criteria in EITF 00-21, the
deliverables are divided into separate units of accounting and revenue is
allocated to the deliverables based on their relative fair values. Revenue for
each unit is recognized separately in accordance with CBIZ's revenue recognition
policy for each unit. For those arrangements where the deliverables do not
qualify as a separate unit of accounting, revenue from all deliverables are
treated as one accounting unit and recognized on a pro-rata basis over the term
of the arrangement.
ACCOUNTING, TAX AND ADVISORY SERVICES -- Revenue consists primarily of fees
for accounting services, preparation of tax returns and consulting services
including Sarbanes-Oxley consulting and compliance projects. Revenues are
recorded in the period in which services are provided and meet revenue
recognition criteria in accordance with SAB 104. CBIZ bills clients based upon a
predetermined agreed-upon fixed fee or actual hours incurred on client projects
at expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact on any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known.
Through one of its ATA units, CBIZ provides flexible benefits
administration services to clients, grants access of its proprietary software to
third parties, and provides hosting to these parties. Revenue associated with
set up and license fees related to our flexible benefits services are deferred
and recognized pro rata over the life of the contract.
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans. A
description of the revenue recognition, based on the insurance product and
billing arrangement, is described below:
- Commissions relating to brokerage and agency activities whereby CBIZ has
primary responsibility for the collection of premiums from insured's
(agency or indirect billing) are recognized as of the latter of the
effective date of the insurance policy or the date billed to the
customer; commissions to be received directly from insurance companies
(direct billing) are recognized when the policy becomes effective; and
life insurance commissions are recognized when the policy becomes
effective. Commission revenue is reported net of sub-broker commissions.
Commission revenue is reported net of reserves for estimated
34
policy cancellations and terminations. This reserve is based upon
estimates and assumptions using historical cancellation and termination
experience and other current factors to project future experience. CBIZ
periodically reviews the adequacy of the reserve and makes adjustments as
necessary. The use of different estimates or assumptions could produce
different results.
- Supplemental commissions, which are based upon certain performance
targets, are recognized at the earlier of notification that the target
has been achieved, or cash collection.
- Fee income is recognized in the period in which services are provided,
and may be based on actual hours incurred on an hourly fee basis, fixed
fee arrangements, or asset-based fees.
NATIONAL PRACTICES -- 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 is recognized on a pro rata basis over the life
of the engagement. Revenue associated with success fee transactions is
recognized when the transaction is completed.
- Technology Consulting -- Revenue associated with hardware and software
sales is recognized upon delivery and acceptance of the product. Revenue
associated with installation and service agreements is recognized as
services are performed. Consulting revenue is recognized on an hourly or
per diem fee basis as services are performed.
- Valuation and Property Tax -- Revenue associated with retainer contracts
is recognized on a pro rata basis over the life of the contract, which is
generally twelve months. Revenue associated with contingency arrangements
is recognized once written notification is received from an outside third
party (e.g., assessor in the case of a property tax engagement)
acknowledging that the contingency has been resolved.
- Medical Management Group -- Fees for services are primarily based on a
percentage of net collections on our clients' patient accounts
receivable. As such, revenue is determinable, earned, and recognized,
when payments are received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE AND 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
collectibility of our accounts receivable, including unbilled accounts
receivable, related to current period service revenue. Management analyzes
historical bad debts, client credit-worthiness, the age of accounts receivable
and current economic trends and conditions when evaluating the adequacy of the
allowance for doubtful accounts and the collectibility of notes receivable.
Significant management judgments and estimates must be made and used in
connection with establishing the allowance for doubtful accounts in any
accounting period. Material differences may result if management made different
judgments or utilized different estimates.
VALUATION OF GOODWILL
Effective January 1, 2002, CBIZ adopted the non-amortization provisions of
SFAS 142, and accordingly ceased amortization of our remaining goodwill balance.
CBIZ evaluated the goodwill for impairment using the fair value impairment
guidelines of SFAS 142. During 2002, CBIZ completed the process of evaluating
our goodwill for impairment using the fair market impairment guidelines of SFAS
142. This change to a new method of accounting for goodwill resulted in a
non-cash impairment charge of $88.6 million on a pretax basis ($80.0 million net
of tax), which was recorded as a cumulative effect of a change in accounting
principle as of January 1, 2002. CBIZ evaluates goodwill for impairment annually
during the fourth quarter of each fiscal year. During 2003 and 2004, there was
no impairment of goodwill based on our annual evaluation.
35
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 December 2004, the Financial Accounting Standards Board ("FASB") issued
the revised Statement of Directors
approvedFinancial Accounting Standards ("FAS") No. 123,
Share-Based Payment ("FAS 123R"), which addresses the accounting for share-based
payment transactions in which the Company obtains employee services in exchange
for (a) equity instruments of the Company or (b) liabilities that are based on
the fair value of the Company's equity instruments or that may be settled by the
issuance of such equity instruments. This statement eliminates the ability to
account for employee share-based payment transactions using APB Opinion No. 25
and requires instead that such transactions be accounted for using the
grant-date fair value based method. This statement will be effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005.
FAS 123(R) applies to all awards granted or modified after the Statement's
effective date. In addition, compensation cost for the unvested portion of
previously granted awards that remain outstanding on the Statement's effective
date shall be recognized on or after the effective date, as the related services
are rendered, based on the awards' grant-date fair value as previously
calculated for the pro-forma disclosure under FAS 123. Compensation expense
calculated in accordance with SFAS 123(R) in future periods may differ from the
pro forma amounts disclosed in Note 1 to the consolidated financial statements
included herewith. The amount of compensation expense will vary depending on the
number of options granted in 2005, the market value of our common stock and
changes in other variables impacting stock option valuation estimates. In
addition, upon adoption of SFAS 123(R), we may choose to use a different
valuation model to estimate stock option fair value.
In December 2004, the FASB issued FAS No. 153, "Exchanges of Non-Monetary
Assets -- An Amendment of APB Opinion No. 29" ("FAS 153"). FAS 153 amends APB
Opinion No. 29, "Accounting for Non-Monetary Transactions." The amendments made
by FAS 153 are based on the principle that exchanges of non-monetary assets
should be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the exception for non-monetary exchanges of similar
productive assets and replace it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. The provisions in FAS
153 are effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Early application of the FAS 153 is permitted.
The provisions of this statement shall be applied prospectively. We do not
expect the adoption of FAS 153 to have a proposed amendmentmaterial effect on CBIZ's financial
statements or results of operations.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CBIZ's floating rate debt under its credit facility exposes the Company to
interest rate risk. 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, 2004, interest expense would increase or decrease by
approximately $0.5 million annually.
CBIZ does not engage in trading market risk sensitive instruments. CBIZ has
used interest rate swaps to manage the interest rate mix of its credit facility
and related overall cost of borrowing. Interest rate swaps involve the exchange
of floating for fixed rate interest payments to effectively convert floating
rate debt into fixed rate debt based on a one, three, or six-month U.S. dollar
LIBOR. Interest rate swaps allow CBIZ to maintain a target range of fixed to
floating rate debt. Management will continue to evaluate the potential use of
interest rate swaps as it deems appropriate under certain operating and market
conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 15(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We evaluated the effectiveness of our disclosure controls and procedures
("Disclosure Controls") as of the end of the period covered by this report. This
evaluation ("Controls Evaluation") was done with the participation of our
Chairman and Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO").
Disclosure Controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 ("Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure Controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our CEO and CFO, does not expect that our
Disclosure Controls or our internal controls over financial reporting ("Internal
Controls") will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, but not absolute,
assurance that the objectives of a control system are met. Further, any control
system reflects limitations on resources, and the benefits of a control system
must be considered relative to its costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within CBIZ have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of a control. A design of a control system is also based upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
37
We have expended extensive internal and external resources to document and
test our internal controls as required by Section 404 of the Sarbanes-Oxley Act
of 2002. The report of our management regarding internal control over financial
reporting and the attestation report of our independent registered public
accounting firm are included in Item 8 of this Annual Report, starting on page
F-1.
In the course of our ongoing evaluation, we have identified internal
control deficiencies in a number of business processes. These deficiencies were
not material to our operations or financial reporting either individually or in
the aggregate. In each instance, we have undertaken efforts to remediate any
deficiencies identified. We are continuing our initiatives to implement new IT
systems where needed to support corporate functions or business unit operations
in order to further enhance operating efficiencies. As these new systems and
procedures are implemented, we continue to evaluate the effectiveness of our
disclosure controls and our internal controls over financial reporting.
CONCLUSIONS
Based upon the Controls Evaluation, our CEO and CFO have concluded that,
subject to the Company's Certificate of
Incorporationlimitations noted above, the Disclosure Controls are effective in
providing reasonable assurance that material information required to change its name from International Alliance Services, Inc.be
disclosed by us in the reports that we file or submit under the Exchange act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
Other than disclosed above, there were no changes in our Internal Controls
that occurred during the quarter ended December 31, 2004 that have materially
affected, or are reasonably likely 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.
12materially affect, our Internal Controls.
ITEM 9B. OTHER INFORMATION
None
38
13PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CENTURY BUSINESS SERVICES, INC.THE REGISTRANT
Information with respect to this item not included below is incorporated by
reference from CBIZ's definitive proxy statement for the 2005 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.
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)................... 59 Chairman and Chief Executive Officer
President and Chairman of
the Board
Gregory J. Skoda(3) 41 Executive Vice President and Director
Charles D. Hamm, Jr.(3) 43 Chief Financial Officer and Treasurer
Edward F. Feighan 50 Senior Vice President, Public Affairs
Douglas R. Gowland 56 Senior Vice President, Business Integration
Keith W. Reeves 40 Senior Vice President, Business Services
Craig L. Stout 49 Senior Vice President, Insurance Services
Rick L. Burdick(1) 46Burdick (1)(3)................. 53 Director and Vice Chairman
Gary W. DeGroote....................... 49 Director
Joseph S. DiMartino 54(3)(4)............. 61 Director
Harve A. Ferrill(1)Ferrill (2) 65 Director
Hugh P. Lowenstein(2) 67(3)................ 72 Director
Richard C. Rochon(1)Rochon (2) 40(3)(4)............ 47 Director
Todd Slotkin (3)(4).................... 52 Director
Donald V. Weir (2)(3).................. 63 Director
Jerome P. Grisko, Jr. (1).............. 43 President and Chief Operating Officer
Ware H. Grove.......................... 54 Senior Vice President and Chief Financial
Officer
Leonard Miller......................... 65 Senior Vice President, Accounting, Tax &
Advisory
Robert A. O'Byrne...................... 48 Senior Vice President, Benefits & Insurance
Michael W. Gleespen.................... 46 Secretary and General Counsel
OTHER KEY EMPLOYEES:
Thomas J. Bregar 41George A. Dufour....................... 58 Senior Vice President Informationand Chief Technology
Systems
Daniel J. Clark 43Officer
Mark M. Waxman......................... 48 Senior 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........................ 40 Vice President, Human Resources
Services
Patrick J. Simers 37Chris Spurio........................... 39 Vice President, Valuation Services
C. Robert Wissler 51Finance
Michael P. Kouzelos.................... 36 Vice President, Comprehensive Business Services
Andrew B. Zelenkofske 37 Vice President, Accounting Systems, Advisory and
Tax Services
Barbara A. Rutigliano 46 Corporate SecretaryStrategic Initiatives
Kelly J. Kuna.......................... 34 Controller
David S. Azzolina...................... 43 Treasurer
- ---------------
(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. DEGROOTE has served as the Chairman ofSteven L. Gerard was elected by the Board of the Company
since April 1995 andto serve as its Chairman in
October, 2002. He was appointed Chief Executive Officer and President since November
1997.Director in October,
2000. Mr. DeGroote also served as PresidentGerard was Chairman and Chief Executive OfficerCEO of the
CompanyGreat Point Capital, Inc., a provider
of operational and advisory services from April 1995 until1997 to October 1996. Mr. DeGroote served as Chairman of
the Board, President and Chief Executive Officer of Republic Industries, Inc.
("RII") from May2000. From 1991 to
August 1995.1997, he was Chairman and CEO of Triangle Wire & Cable, Inc. and its successor
Ocean View Capital, Inc. Mr. DeGroote founded Laidlaw Inc., a
Canadian waste servicesGerard's prior experience includes 16 years with
Citibank, N.A. in various senior corporate finance and transportation companybanking positions,
including ultimately Senior Managing Director, responsible for the risk
management of Citibank's commercial and investment banking activities 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 and a Director
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. Prior to the Company's
acquisition of SMR & Co. Business Services ("SMR") in December 1996, 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. Hamm was associated with KPMG Peat Marwick LLP from
June 1984 until November 1997, serving as a partner of such firm from July 1996
until November 1997. Mr. Hamm is a CPA and a member of the American Institute of
Certified Public Accountants and the Ohio Society of Certified Public
Accountants.
EDWARD F. FEIGHAN has served as Senior Vice President, Public Affairs of
the Company since November 1997. 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 FeighanEurope, Australia and Japan. Further, Mr. Gerard served
on39
seven years with 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 has served as Senior Vice President, Business
Integration since November 1997. Mr. Gowland served as a Director of the Company
from April 1995 through November 1997. From April 1995 until October 1996, Mr.
Gowland served as the Company'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. From March 1991 to January 1992,
Mr. GowlandAmerican Stock Exchange, where he last served as Vice
President of DRG Environmental Management, Inc. Prior
thereto, he served as President of Great Lakes Environmental Systems, Ltd.
KEITH W. REEVES has served as Senior Vice President, Business Services
since March 1997 and as a director and an officer of a number of the Company's
subsidiaries.Securities Division. Mr. Reeves has also served as the President of SMR since December
1996. Mr. Reeves served as Vice President of SMR from August 1984 until its
acquisition by the Company in December 1996. Mr. Reeves is a CPA and a member of
the American Institute of Certified Public Accountants and the Ohio Society of
Certified Public Accountants.
CRAIG L. STOUT has served as Senior Vice President, Insurance Services
since November 1997. Mr. Stout served as Chief Operating Officer and a Director
of the Company from October 1996 through November 1997. Mr. StoutGerard also serves as
a directoron the Boards of
Directors of Fairchild Company, Inc., Lennar Corporation, TIMCO Aviation
Services, Inc. and an officer of a number of the Company's subsidiaries. Prior to
joining the Company, Mr. Stout served as Executive Vice President of Alliance
Holding Corporation which was the holding corporation of the CSC Group and CSA
and two other companies which he founded, Contract Operations Planning,Joy Global, Inc., a
surety claims management firm, and Contract Surety Reinsurance Corporation, a
reinsurance intermediary for facultative surety reinsurance.
RICK
Rick L. BURDICKBurdick has served as a Director of CBIZ since October 1997, when
he was elected as an independent director. In October 2002, he was elected by
the Company since November
1997.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.L.P.L.P since April 1988.
Mr. Burdick serves on the BoardsBoard of Directors of RII and J. Ray McDermott, S.A.
JOSEPH S. DIMARTINOAutoNation, Inc.
Gary W. DeGroote has served as a Director of CBIZ since October, 2002, when
he was elected as an independent director to serve the Companyremaining 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 Waste Services, Inc.
Joseph S. DiMartino has served as a Director of CBIZ since November 1997.1997,
when he was elected as an independent director. Mr. DiMartino has been Chairman
of the Board of the Dreyfus GroupFamily 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 1994.1994 and also served as a director
of Mellon Bank Corporation. Mr. DiMartino also serves on the Board of Directors
of Noel Group,LEVCOR International, Inc.,
Staffing Resources, Inc., Health Plan Services Corporation, (formerly Carlyle Industries, Inc.), The Newark
Group, and the Muscular Dystrophy Association.
HARVEHarve A. FERRILLFerrill has served as a Director of the CompanyCBIZ since October 1996.1996, when
he was elected as an independent director. Mr. Ferrill has served as Chief Executive
Officer and Chairman 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 ChairmanPresident of
the BoardAdvance Ross Corporation from 1990 to 1992. Since 1996, Advance Ross Corporation
has been a wholly-owned subsidiary of GeoWaste
Incorporated since 1991 and alsoCendant Corporation. Mr. Ferrill serves on the Boardsas
a Director of DirectorsHorny Toad, Inc., a manufacturer of Gaylord
Container Corporation and Quill Corporation.
HUGH P. LOWENSTEINsports clothing.
Richard C. Rochon has served as a Director of the CompanyCBIZ since March
1997.October 1996, when
he was elected as an independent director. Mr. Lowenstein has served as the FounderRochon is Chairman and Chief
Executive Officer of ShoreRoyal Palm Capital Ltd. (Bermuda)Partners, a private investment and
management firm. Mr. Rochon serves as a director with Bancshares of Florida
(BOFL), a consultingFlorida Banking Corporation. He is also a director of Devcon
International (DEVC), a materials and investment advisory firm, since
1994.aggregates and electronic securities
company. Mr. Lowenstein served as a Managing DirectorRochon is Chairman 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 asSunair, Inc. (SNR), a Director of the Company since October
1996.specialty
radio communications and pest control company. From 1985 to February 2002, Mr.
Rochon has served since 1988in various capacities with, and most recently 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.owned by H. Wayne
Huizenga. Mr. Rochon also has served aswas a former director since Septemberof Boca Resorts, Inc. from 1996
and as
Vice Chairman of Florida Panthers Holdings, Inc., a leisure and recreation and
sports and entertainment company, since April 1997.through 2004. From 1985 until 1988, Mr.
Rochon served as Treasurer of Huizenga Holdings, Inc. and from 1979 until 1985, heMr. Rochon was employed as a certified
public accountant by the international public accounting firm of Coopers & Lybrand, L.L.P.
OTHER KEY EMPLOYEES:
THOMAS J. BREGARTodd Slotkin has served as a Director of CBIZ since September 2, 2003, when
he was namedelected as an independent director. Mr. Slotkin serves as Executive Vice
President Information Technology Systems
in November 1997. Mr. Bregar joined SMR in December 1996 to develop its
Information Technology Consulting Practice.and CFO of MacAndrews and Forbes Holdings, and as Executive Vice
President and CFO of publicly owned MYF Worldwide (NYSE:MFW). Prior to joining
SMR,MacAndrews & Forbes in 1992, Mr. Bregar wasSlotkin spent 17 years with Price Waterhouse's Management Consulting Services Practice from 1986
through 1992,Citicorp,
ultimately serving as senior managing director 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,senior credit officer. Mr.
Clark served as Chief of Staff for then
Congressman Edward F. Feighan from 1983 through 1993. Mr. Clark is a member of
the Ohio Bar Association and serves as a Board Member 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 andSlotkin serves on the Board of Managers of Spectaguard and 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 BoardsBoard of
Directors of the MarchTransTech Pharma; formerly served as director of DimesCalFed Bank; 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., subsidiariesco-founder of the Company.Food Allergy Institute.
Donald V. Weir has served as a Director of CBIZ since September 2, 2003,
when he was elected as an independent director. Mr. MillisorWeir has served as financial
consultant with Sanders Morris Harris for the past four years. Prior to this Mr.
Weir was admittedCFO and director of publicly-held Deeptech International and two of its
subsidiaries, Tatham Offshore and Leviathan Gas Pipeline Company, the latter of
which was a publicly -- held company. Prior to the Barhis employment with Deeptech, Mr.
Weir worked for eight years with Sugar Bowl Gas
40
Corporation, as Controller and Treasurer and later in 1961 and isa consulting capacity. Mr.
Weir was associated with Price Waterhouse, 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 servesinternational accounting firm,
from 1966 to 1979.
Jerome P. Grisko, Jr. has served as President and Chief ExecutiveOperating Officer
of Comprehensive Business Services, Inc.,CBIZ since February 1, 2000. Mr. Grisko joined CBIZ as Vice President,
Mergers & Acquisitions in September 1998 and was promoted to Senior Vice
President, Mergers & Acquisitions and Legal Affairs in December of 1998. Prior
to joining CBIZ, Mr. Grisko was associated with the law firm of Baker &
Hostetler LLP, where he practiced from September 1987 until September 1998,
serving as a subsidiarypartner of such firm from January 1995 to September 1998. While at
Baker & Hostetler, Mr. Grisko concentrated his practice in the Company. He wasarea of mergers,
acquisitions and divestitures.
Ware H. Grove has served as Senior Vice President and Chief Financial
Officer of Sir Speedy, Inc. from 1978
through 1990. Prior to that time,CBIZ since December 2000. Before joining CBIZ, 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 namedGrove served as
Senior Vice President Accounting Systems,
Advisory and Tax Services in November 1997. Mr. Zelenkofske serves as PresidentChief Financial Officer of ZA Business Services,Bridgestreet
Accommodations, Inc., a subsidiary of the Company.which he joined in early 2000 to restructure financing,
develop strategic operating alternatives, and assist with merger negotiations.
Prior to joining Century,Bridgestreet, Mr. ZelenkofskeGrove served for severalthree years as Vice
President and Managing
DirectorChief Financial Officer of Zelenkofske AxelrodLesco, Inc. Since beginning his career
in corporate finance in 1972, Mr. Grove has held various financial positions
with large companies representing a variety of industries, including Revco D.S.,
Inc., Computerland/Vanstar, Manville Corporation, The Upjohn Company, and Co., Ltd.First
of America Bank. In September, 2004, Mr. Zelenkofske is a CPA and has
beenGrove was appointed to the Pennsylvania State Board of
Accountancy.
BARBARA A. RUTIGLIANO was named Corporate Secretary in December 1997. Ms.
Rutigliano was Senior CounselDirectors for Applica, Inc. (NYSE: APN) 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,Audit Committee.
Leonard Miller has served as CBIZ Accounting, Tax and Advisory Services
Practice Head since November 2000 and was appointed Senior Vice President in
February 2002. Mr. Miller was the President and Director of Financial Operations
for Miller Wagner & Company, Ltd. in Phoenix, Arizona for 22 years before the
firm joined the Century Business Services family and became Miller Wagner
Business Services, Inc. and Miller Wagner & Company, PLLC. Mr. Miller was the
Regional Managing Partner for Lester Witte and Company, and was responsible for
11 of its offices prior to co-founding Miller Wagner & Company, Ltd. With over
40 years of experience, Mr. Miller is a recognized expert in the fields of
finance, real estate, general business consulting and various litigation support
matters. Mr. Miller's professional affiliations include the American Bar AssociationInstitute
of Certified Public Accountants (AICPA), the Arizona Society of Certified Public
Accountants (ASCPA) and the Illinois Society of Certified Public Accountants
(ISCPA).
Robert A. O'Byrne has serves as a Senior Vice President of CBIZ since
December 1998 and is responsible for CBIZ' Benefits and Insurance Services. 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 25 years of experience in the insurance and benefits
consulting field.
Michael W. Gleespen has served as Corporate Secretary since April 2001 and
General Counsel since June 2001. Mr. Gleespen is an attorney and has served as
CBIZ' Vice President of Regulatory Compliance and Accountancy Compliance Officer
and Technical Director since February 1998. Prior to joining CBIZ, Mr. Gleespen
was an Assistant Ohio Attorney General in the Business & Government Regulation
Section and the Court of Claims Defense Section from 1988 until 1998, during
which time he was counsel to the Ohio Accountancy Board, the Ohio State Teachers
Retirement System and represented many other state departments and agencies. Mr.
Gleespen also held the post of Associate Attorney General for Pension,
Disability and Annuity Plans and was the Co-Chairman of the Public Pension Plan
Working Group. Mr. Gleespen is a member of the Board of Directors of the Cancer
Hope Foundation and is a member of the American Society of Corporate
Secretaries.
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".OTHER KEY EMPLOYEES:
George A. Dufour was appointed Senior Vice President and Chief Technology
Officer in July 2001. Prior to December 23, 1997,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 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.health system. Prior to April 27, 1995, the day on
which the Common Stockjoining 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 the Company was first publicly traded,Ohio and served most recently
there was no
public market for the Common Stockas Director 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 useInformation Systems Development. Mr. Dufour commenced his
career 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 this Annual Report
of Century. The information set forth below should be read in conjunction with
"Management's
1741
18
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
18
19
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
20
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
22
23
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
preparationwhich includes tenures at Cook United, Cole National
Corporation, General Tire & Rubber, Picker Corporation, and compliance, and business valuations,Sherwin Williams, in
1971 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 InsuranceEducation for the Institute of Computer Management, a
division of Litton Industries. Mr. Dufour is a member of the State ofnortheast Ohio
is limited to the greaterchapter of the statutory net incomeHealthcare Information Management Systems Society. Mr. Dufour
earned his MBA from Baldwin Wallace College.
Mark M. Waxman has over twenty years experience in marketing and branding.
Prior to joining CBIZ, he was CEO/Creative Director of one of Silicon Valley's
most well-known advertising agencies, Carter Waxman. Most recently, he was a
founding partner of SK Consulting (acquired by CBIZ in 1998) providing strategic
marketing and branding services to a wide range of companies and industries. Mr.
Waxman has been a featured marketing columnist and contributor to many business
and trade publications, and currently serves on the Board of Trustees of the
preceding calendar year or 10% of total statutory shareholder's equityMontalvo Center for the Arts, the West Valley Mission Foundation, and Catholic
Charities, and he recently served 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. Ferrillthe Silicon
Valley Chamber of Commerce.
Teresa E. Bruce has served as Vice President of Human Resources since
January 1999. From 1995 to 1999 Ms. Bruce served as Director of Human Resources
for Robert D. O'Byrne & Associates, Inc. and Richard C.
Rochon, directorsThe Grant Nelson Group, Inc.,
subsidiaries of Century, respectively, purchasedCBIZ now known as CBIZ Benefits and Insurance Services, Inc. Ms.
Bruce has over 18 years of experience in human resources and is an aggregate of 616,611
Units. Upon issuanceactive member
of the second trancheGreater Kansas City Chapter of The Human Resources Management Association
and Society of Human Resources Management, and is certified as a Senior
Professional in Human Resources (SPHR).
Chris Spurio has served as Vice President of Finance since July 1999.
Previously, Mr. Spurio was Controller since January 1998. Mr. Spurio also served
as Acting Chief Financial Officer from May 2000 to December 2000. Mr. Spurio was
associated with KPMG LLP, an international accounting firm, from July 1988 to
January 1998, serving as a Senior Manager of such firm from July 1995 to January
1998. Mr. Spurio is a CPA and a member of the Units, CenturyAmerican Institute of Certified
Public Accountants and the Ohio Society of Certified Public Accountants.
Michael P. Kouzelos has served as Vice President of Strategic Initiatives
since April 2001. Mr. Kouzelos served as Vice President of Shared Services from
August 2000 to March 2001 and Director of Business Integration from June 1998 to
July 2000. Mr. Kouzelos was associated with KPMG LLP, an international
accounting firm, from 1990 to September 1996 and received an
additional $5.3 millionhis Masters in
proceeds.
On February 6, 1998, the Company accepted subscriptions for 5,000,000
sharesBusiness Administration from The Ohio State University in May of 1998. Mr.
Kouzelos is a CPA and a member of the Company's Common Stock, consistingAmerican Institute of 3,800,000 newly-issued
sharesCertified Public
Accountants and 1,200,000 sharesthe Ohio Society of outstanding Common Stock offeredCertified Public Accountants.
Kelly J. Kuna has served as Corporate Controller since July 1999. Ms. Kuna
served as Manager of External Reporting from December 1998 to June 1999. Prior
to joining CBIZ, Ms. Kuna was associated with KPMG LLP, an international
accounting firm, from 1992 to December 1998, serving as a Senior Manager of such
firm from July 1998 to December 1998. Ms. Kuna is a CPA and a member of the
American Institute of Certified Public Accountants and the Ohio Society of
Certified Public Accountants.
David S. Azzolina joined CBIZ in April 1999 and was appointed Corporate
Treasurer in May 2000. Prior to joining CBIZ, Mr. Azzolina spent 13 years at
Bioproducts, Inc. in a broad range of financial assignments, including strategic
initiatives, financial planning and analysis, accounting, and cash management.
Mr. Azzolina has over twenty years of financial experience. He received a B.S.
degree in accounting from The Ohio State University in 1983 and an M.B.A. degree
from The University of Akron in 1998. Mr. Azzolina is a licensed Certified
Public Accountant, State of Ohio.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by certain
selling shareholders. The Company received proceeds of approximately $41 millionreference from the
discussion under the heading "Executive Compensation" in CBIZ's definitive proxy
statement for the newly issued shares. Such proceeds will be used for general corporate
purposes, including acquisitions. Additionally, the selling shareholders either
exercised or caused2005 Annual Stockholders' 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
25CBIZ's fiscal year.
42
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.
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 2005 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 information appearingfollowing is a summary of certain agreements and transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
CBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
properties owned indirectly by and leased from persons employed by CBIZ. In the
aggregate, CBIZ paid approximately $1.3 million, $1.4 million, and $0.8 million
for the years ended 2004, 2003 and 2002, respectively, under such leases which
management believes were at market rates.
Rick L. Burdick, a director of CBIZ, is a partner of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump.) Akin, Gump performed legal work for CBIZ
during 2004, 2003 and 2002 for which the captions "Certain Relationshipsfirm received approximately $0.2
million, $0.2 million, and Related Transactions"$0.1 million from CBIZ, respectively.
Robert A. O'Byrne, a Senior Vice President, 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 Proxy Statementevent of death, disability, retirement or other
termination. The program was in existence at the time CBIZ acquired the former
company, of which Mr. O'Byrne was an owner.
CBIZ maintains joint-referral relationships and administrative service
agreements with independent licensed CPA firms under which CBIZ provides
administrative services in exchange for a fee. These firms are owned by licensed
CPAs who are employed by CBIZ subsidiaries, and provide audit and attest
services to clients including CBIZ's clients. The CPA firms with which CBIZ
maintains service agreements operate as limited liability corporations, limited
liability partnerships or professional corporations. The firms are separate
legal entities with separate governing bodies and officers. CBIZ has no
ownership interest in any of these CPA firms, and neither the existence of the
administrative service agreements nor the providing of services thereunder is
intended to constitute control of the CPA firms by CBIZ. CBIZ and the CPA firms
maintain their own respective liability and risk of loss in connection with
performance of each of its respective services, and CBIZ does not believe that
its arrangements with these CPA firms result in additional risk of loss.
Although the service agreements do not constitute control, CBIZ is one of
the beneficiaries of the agreements and may bear certain economic risks. As
such, the CPA firms with which CBIZ maintains administrative service agreements
may qualify as variable interest entities under FASB Interpretation No. 46 (FIN
46), "Consolidation of Variable Interest Entities". The impact to CBIZ of this
accounting pronouncement is discussed in the notes to CBIZ's consolidated
financial statements included herewith.
CBIZ also acted as guarantor on three letters of credit for a CPA firm with
which it has an affiliation. The letters of credit total $1.3 million and $0.7
million as of December 31, 2004, and December 31, 2003, respectively. In
accordance with FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and its amendments ("FIN 45-1" and "FIN 45-2"), CBIZ has
recognized a liability for the fair value of the obligations undertaken in
issuing these guarantees, which is recorded as other current liabilities in the
accompanying consolidated financial statements. Management does not expect any
material changes to result from these instruments as performance is not expected
to be required.
In 2002, CBIZ executed a note receivable with a CPA firm whose partner
group has since joined MHM, PC, a CPA firm with which CBIZ maintains an
administrative services agreement. The balance on the note at December 31, 2004
and 2003 was approximately $0.2 million and $0.2 million, respectively.
43
CBIZ divested several operations during 2004, 2003, and 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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information with respect to this item is incorporated herein by reference.reference from
CBIZ's definitive proxy statement for the 2005 Annual Stockholders' Meeting to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of CBIZ's fiscal year.
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements.
As to financial statements and supplementary information, reference is
made to "Index to Financial Statements" on page F-1 of this Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to "Index to
Financial Statements" on page F-1 of this Annual Report.
3. Exhibits.
The following documents are filed as exhibits to this Form 10-K pursuant to
Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of 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 CBIZ's Annual Report Form 10-K for the Company's Registration Statement on Form 10, file no. 0-25890,year
ended December 31, 1998, 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 Holding4.4 CBIZ Business Services Employee Stock Investment Plan (filed
as Exhibit 99.7exhibit 4.4 to the Company's CurrentCBIZ's Report on Form 8-K dated October 18,
1996,S-8 filed June 1,
2001, and incorporated herein by reference).
4.3*10.1 Form of Warrant for theto purchase 900,000 shares 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 AmericaCBIZ's common
stock issued to Jackson National Trust and Savings
Association, as Agent and Letter of Credit BankLife Insurance Company
(filed as Exhibit 10.110.2 to the
Company'sCBIZ's Annual Report on Form 10-Q10-K for
the periodyear ended September 30,December 31, 1998, and incorporated herein by
reference).
10.2 1996 Employee Stock Option Plan (filed as Appendix I to
CBIZ's Proxy Statement 1997 Annual Meeting of Stockholders
dated April 1, 1997 and incorporated herein by reference).
2744
28
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------
10.2 Agreement and10.3 Amendment to the 1996 Employee Stock Option 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 IExhibit 99.2 to the Company's Definitive
Schedule 14C Information StatementCBIZ's Current Report on Form 8-K dated
September 23, 1996December 14, 1998, 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,
1996filed January 12, 1999 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 andEmployee Stock Option Plan of Merger by and among Century Business Services, Inc.,
Century/SMR Acquisition Co., SMR and its shareholders dated November 30, 1996
(filed on
Secretary's Certificate as Exhibit 10.1810.10 to the Company'sCBIZ's Annual
Report on Form 10-K for the year ended December 31, 19962000,
and incorporated herein by reference).
10.6 1996 Employee Stock Option Plan (filed as Appendix I to the Company's Proxy
Statement 1997 Annual Meeting of Stockholders dated April 1, 1997 and
incorporated herein by reference).
10.7* Amendment to 1996 Employee Stock Option Plan, effective December 8, 1997.
10.8 Agents 1997 Stock Option Plan (filed as Appendix II to the Company's Proxy
Statement 1997 Annual Meeting of Stockholders dated April 1, 1997 and
incorporated herein by reference).
10.9* Subscription10.5 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).
10.7 Employment Agreement by and between Century Business
Services, Inc. and Steven L. Gerard (filed as exhibit 10.13
to CBIZ's Report on Form 10-K for the year ended December
31, 2000, and incorporated herein by reference).
10.8 Employment Agreement by and between Century Business
Services, Inc. and Ware H. Grove (filed as exhibit 10.14 to
CBIZ's Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
10.10 Credit Agreement dated September 26, 2002 among Century
Business Services, Inc., Bank of America, N.A. as Agent,
Issuing Bank, and Swing Line Bank, and the Other Financial
Institutions Party Hereto (filed as exhibit 10.17 to CBIZ's
Report on Form 10-Q for the period ended September 30, 2002,
and incorporated herein by reference).
10.11 First amendment to Amended and Restated Credit Agreement
effective June 6, 2003 among Century Business Services, Inc.
and each of the Guranators (filed as exhibit 99.B.II to
CBIZ's Report on Form SC TO-I filed June 10,2003, and
10.12* Amended and Restated Credit Agreement dated Februaryas of August 6,
1998.2004, among Century Business Services, Inc., Bank of
America, N.A., as Agent, a Lender, Issuing Bank and Swing
Line Bank, and The Other Financial Institutions Party
Hereto.
21.1* List of Subsidiaries of Century Business Services, Inc.
24.1*23* Consent of KPMG Peat Marwick LLP.
24* Powers of attorney (included on the signature page hereto).
31.1* Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- ---------------
* Indicates documents filed herewith.
(b) Reports on Form 8-K
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 Reportduring the three months
ended December 31, 2004:
(a) On November 1, 2004, CBIZ furnished a current report on Form 8-K
dated April 3, 1997.
Current Reportto provide investors with its third quarter earnings, as released to the
public and discussed on Form 8-K dated April 21, 1997.
Current Reporta conference call on Form 8-K dated July 23, 1997, as amended on Form
8-K/A dated October 3, 1997.
2826, 2004.
45
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Century Business Services, Inc. has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CENTURY BUSINESS SERVICES, INC.
(Registrant)
By:(REGISTRANT)
By /s/ GREGORY J. SKODAWARE H. GROVE
------------------------------------
Gregory J. Skoda
Executive Vice President
February 17, 1998Ware H. Grove
Chief Financial Officer
March 15, 2005
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 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 /s/ TODD SLOTKIN
- -------------------------------------------- --------------------------------------------
Rick L. Burdick Richard C. RochonTodd Slotkin
Director Director
/s/ DONALD V. WEIR
- --------------------------------------------
Donald V. Weir
Director
2946
30
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
Management's Report on Internal Control Over Financial
Reporting.............................................. F-2
Report of Independent Auditors' Report........................................................ F-2Registered Public Accounting Firm On
Internal Control Over Financial Reporting.............. F-3
Report of Independent Registered Public Accounting Firm... F-4
Consolidated and Combined Balance Sheets as of December 31, 19972004 and
1996....................................................... F-32003................................................... F-5
Consolidated and Combined Statements of Income ForOperations for the Years Endedyears ended
December 31, 1997, 19962004, 2003 and 1995................................................. F-42002....................... F-6
Consolidated and Combined Statements of Shareholders'Stockholders' Equity Forfor the
Years Endedyears ended December 31, 1997, 19962004, 2003 and 1995................................................. F-52002........... F-7
Consolidated and Combined Statements of Cash Flows Forfor the Years Endedyears ended
December 31, 1997, 19962004, 2003 and 1995................................................. F-62002....................... F-8
Notes to the Consolidated Financial Statements............ F-9
Schedule II -- Valuation and Combined Financial Statements............................. F-7
Schedule I -- Summary of Investments -- Other than Investments in Related
Parties as ofQualifying Accounts and
Reserves for the years ended December 31, 1997.................................................. F-28
Schedule III -- Supplementary Insurance Information For the Years Ended
December 31, 1997, 19962004, 2003
and 1995................................................. F-29
Schedule IV -- Reinsurance For the Years Ended
December 31, 1997, 1996 and 1995................................................. F-302002............................................... F-37
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the
supervision of management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of our internal control over
financial reporting based on the framework provided in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO Framework).
Our assessment of the design of controls and our testing to determine the
effectiveness of controls over financial reporting required under Sections 404
of the Sarbanes-Oxley Act of 2002 has indicated that we have some deficiencies
in internal control over financial reporting, and management is working to
remediate those deficiencies. Our management has concluded that those
deficiencies, individually and in the aggregate, do not constitute a material
weakness in internal control over financial reporting. Because of the inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
disclosure. Based on our evaluation under the COSO Framework, our management has
concluded that our internal control over financial reporting was effective as of
December 31, 2004 at a reasonable assurance level.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by KPMG, LLP,
an independent registered public accounting firm, as stated in their report
which is included in Item 8 of our Annual Report on Form 10-K.
/s/ STEVEN L. GERARD
- ---------------------------------------------------------
Steven L. Gerard
Chairman and Chief Executive Officer
/s/ WARE H. GROVE
- ---------------------------------------------------------
Ware H. Grove
Chief Financial Officer
Principal Financial and Accounting Officer
F-2
REPORT OF INDEPENDENT AUDITORS'REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Century Business Services, Inc.:
We have audited management's assessment, included in the accompanying
Management's report on internal control over financial reporting, that Century
Business Services, Inc. and subsidiaries (Company) maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Century Business Services, Inc. and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated March 15, 2005 expressed an
unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Cleveland, Ohio
March 15, 2005
F-3
REPORT BOARD OF DIRECTORS
CENTURY BUSINESS SERVICES, INC.INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 Subsidiariessubsidiaries (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 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 the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards.the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether 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 atsubsidiaries as of December 31, 19972004 and 1996,2003, 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, 1997,2004, in conformity with U.S. generally
accepted accounting principles. 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.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 15, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
February 17, 1998
F-2March 15, 2005
F-4
32
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(IN THOUSANDS)
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,291 $ 3,791
Restricted cash........................................... 10,089 10,880
Accounts receivable, net.................................. 109,683 109,436
Notes receivable -- current............................... 1,377 1,315
Income taxes recoverable.................................. 7,146 438
Deferred income taxes -- current.......................... 3,594 3,360
Other current assets...................................... 8,195 7,651
Assets of businesses held for sale........................ 417 3,179
--------- ---------
Current assets before funds held for clients...... 145,792 140,050
Funds held for clients...................................... 38,236 44,917
--------- ---------
Total current assets.............................. 184,028 184,967
Property and equipment, net................................. 37,772 40,095
Notes receivable -- non-current............................. 4,726 2,433
Deferred income taxes -- non-current........................ 6,801 4,215
Goodwill and other intangible assets, net................... 172,644 167,280
Assets of deferred compensation plan........................ 4,285 --
Other assets................................................ 3,517 3,155
--------- ---------
Total assets...................................... $ 413,773 $ 402,145
========= =========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 25,876 $ 28,495
Accrued personnel costs................................... 24,597 21,049
Other current liabilities................................. 17,226 13,129
Liabilities of businesses held for sale................... 165 826
--------- ---------
Current liabilities before client fund
obligations..................................... 67,864 63,499
Client fund obligations................................... 38,236 44,917
--------- ---------
Total current liabilities......................... 106,100 108,416
Bank debt................................................... 53,900 14,000
Liabilities of deferred compensation plan................... 4,285 --
Other non-current liabilities............................... 2,991 1,891
--------- ---------
Total liabilities................................. 167,276 124,307
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share
Shares authorized 250,000; Shares issued 96,407 and
95,673; Shares outstanding 75,651 and 85,371.............. 964 957
Additional paid-in capital.................................. 444,584 441,407
Accumulated deficit......................................... (113,387) (129,438)
Treasury stock, 20,756 and 10,302 shares.................... (85,650) (35,087)
Accumulated other comprehensive loss........................ (14) (1)
--------- ---------
Total stockholders' equity........................ 246,497 277,838
--------- ---------
Total liabilities and stockholders' equity........ $ 413,773 $ 402,145
========= =========
See the accompanying notes to the consolidated financial statements.
F-5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1997 AND 1996
1997 19962004 2003 2002
-------- -------- --------
ASSETS
Cash
Revenue..................................................... $520,057 $506,782 $492,955
Operating expenses.......................................... 459,357 441,652 434,389
-------- -------- --------
Gross margin................................................ 60,700 65,130 58,566
Corporate general and cash equivalents.............................................. $ 21,148 $ 39,874
Accounts receivable, less allowance for doubtful accountsadministrative expense................ 24,773 19,518 19,177
Depreciation and amortization expense....................... 16,428 17,089 20,361
-------- -------- --------
Operating income............................................ 19,499 28,523 19,028
Other income (expense):
Interest expense.......................................... (1,507) (1,055) (2,477)
Gain on sale of $1,472 and
$0, respectively..................................................... 32,235 598
Premiums receivable, less allowance for doubtful accounts of $281 and
$284, respectively................................................... 7,812 7,013
Investments (Note 4):
Fixed maturities 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 4,799operations, net........................... 996 2,519 930
Other income (expense), net............................... 3,554 (1,209) (1,567)
-------- -------- --------
Total investments................................................. 79,720 68,649
Deferred policy acquisition costs (Note 8)............................. 4,478 4,345
Reinsurance recoverables (Note 7)...................................... 15,215 11,185
Excessother income (expense), net................. 3,043 255 (3,114)
Income from continuing operations before income tax
expense................................................... 22,542 28,778 15,914
Income tax expense.......................................... 5,691 12,495 8,154
-------- -------- --------
Income from continuing operations........................... 16,851 16,283 7,760
Loss from operations of cost over net assets ofdiscontinued businesses, acquired, net of
accumulated amortizationtax....................................................... (932) (1,693) (2,130)
Gain (loss) on disposal 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 --
Other assets........................................................... 20,524 6,619discontinued businesses, net of
tax....................................................... 132 726 (2,471)
-------- -------- TOTAL ASSETS........................................................... $287,567 $167,330--------
Income before cumulative effect of change in accounting
principle................................................. 16,051 15,316 3,159
Cumulative effect of change in accounting principle, net of
tax....................................................... -- -- (80,007)
-------- -------- --------
Net income (loss)........................................... $ 16,051 $ 15,316 $(76,848)
======== ======== LIABILITIES
Accounts payable.......................................................========
Earnings (loss) per share:
Basic:
Continuing operations.................................. $ 9,4370.21 $ 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 5,5760.18 $ 0.08
Discontinued operations................................ (0.01) (0.01) (0.05)
Cumulative effect of change in accounting principle.... -- -- (0.84)
-------- -------- TOTAL LIABILITIES...................................................... 139,657 76,008--------
Net income (loss)...................................... $ 0.20 $ 0.17 $ (0.81)
======== ======== ========
Diluted:
Continuing operations.................................. $ 0.21 $ 0.18 $ 0.08
Discontinued operations................................ (0.01) (0.01) (0.05)
Cumulative effect of change in accounting principle.... -- -- (0.82)
-------- -------- SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (Note 5)
Authorized -- 100,000,000--------
Net income (loss)...................................... $ 0.20 $ 0.17 $ (0.79)
======== ======== ========
Basic weighted average common shares Issued and outstanding -- 41,464,099outstanding....... 79,217 90,400 94,810
======== ======== ========
Diluted weighted average common shares at December 31, 1997;
-- 33,764,506 shares at December 31, 1996... 415 338
Additional paid-in capital............................................. 127,517 80,446
Retained earnings...................................................... 18,372 6,842
Net unrealized appreciation of investments (net of tax)................ 1,606 3,696
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................................. 147,910 91,322
-------- --------
Commitments and contingencies (Note 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $287,567 $167,330outstanding..... 81,477 92,762 96,992
======== ======== ========
See the accompanying notes to the consolidated and combined financial statements.
F-3F-6
33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 19962004, 2003 AND 19952002
(IN THOUSANDS)
1997 1996 1995ACCUMULATED
ISSUED ADDITIONAL OTHER
COMMON COMMON PAID-IN ACCUM. TREASURY TREASURY COMPREHENSIVE
SHARES STOCK CAPITAL DEFICIT SHARES STOCK INCOME (LOSS) TOTALS
------ ------ ---------- --------- -------- ------- --------------- ------------- --------
Revenues:
Business services fees and commissions.....................
December 31, 2001.................. 94,879 $949 $439,136 $ 63,411(67,906) 220 $ 1,606 $(1,308) $(224) $370,647
Comprehensive loss:
Net loss....................... -- 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
--------- ---------- -- (76,848) -- -- -- (76,848)
Change in unrealized
appreciation, net of
tax....................... (31) (31)
--------
Total revenues........................................ 108,230 35,769 30,939
Expenses:
Operating expensescomprehensive
loss.................... (76,879)
Stock options.................. 242 2 548 -- 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
Corporate general and administrative expenses.............. 4,578 302 -- Depreciation and amortization expenses..................... 2,612 320 -- Other expenses............................................. 2,331 2,655 3,157550
------ ---- -------- --------- ------ -------- ----- --------
December 31, 2002.................. 95,121 $951 $439,684 $(144,754) 220 $ (1,308) $(255) $294,318
Comprehensive income:
Net income..................... -- -- -- 15,316 -- -- -- 15,316
Change in unrealized
appreciation, net of
tax....................... 254 254
--------
Total expenses........................................ 90,150 29,707 26,048
Income from continuing operations before net corporate
interest income and income tax expense..................... 18,080 6,062 4,891
Net corporate interest income................................ 965comprehensive
income.................. 15,570
Share repurchase............. -- -- --------- -------- --------
Income from continuing operations before income tax
expense.................................................... 19,045 6,062 4,891
Income tax expense (Note 10)................................. 6,280 1,640 1,422
--------- -------- --------
Income from continuing operations............................ 12,765 4,422 3,469
Loss from operations of discontinued business (net of income
tax expense (benefit) of $(316), $91 and $0,
respectively).............................................. 663 38 --
Loss on disposal of discontinued business (net of income tax
benefit of $305 in 1997) (Note 15)......................... 572 -- -- --------- -------- --------
Net income............................................ $ 11,530 $ 4,384 $ 3,469
========= ======== ========
Earnings per share (Note 3):
Basic:
Income from continuing operations....................... $ 0.35 $ 0.25 $ 0.24
Loss from discontinued operations....................... (0.04)10,036 (33,578) -- (33,578)
Divestiture consideration.... -- -- -- -- 46 (201) -- (201)
Stock options................ 375 4 1,203 -- -- -- -- 1,207
Business acquisitions and
contingent payments............ 177 2 520 -- -- -- -- 522
------ ---- -------- --------- ------ -------- ----- --------
December 31, 2003.................. 95,673 $957 $441,407 $(129,438) 10,302 $(35,087) $ (1) $277,838
Comprehensive income:
Net income per share..................................income..................... -- -- -- 16,051 -- -- -- 16,051
Foreign currency
translation adjustments... (13) (13)
--------
Total comprehensive
income.................. 16,038
Share repurchase............. -- -- -- -- 10,424 (50,419) -- (50,419)
Restricted stock............. -- -- 518 -- -- -- 518
Divestiture consideration.... -- -- -- -- 30 (144) -- (144)
Stock options................ 519 5 1,696 -- -- -- -- 1,701
Business acquisitions and
contingent payments............ 215 2 963 -- -- -- -- 965
------ ---- -------- --------- ------ -------- ----- --------
December 31, 2004................ 96,407 $964 $444,584 $(113,387) 20,756 $(85,650) $ 0.31 $ 0.25 $ 0.24(14) $246,497
====== ==== ======== ========= ====== ======== ========
Diluted:
Income from continuing operations....................... $ 0.26 $ 0.18 $ 0.20
Loss from discontinued operations....................... (0.02) --
--------- -------- --------
Net income per share.................................. $ 0.24 $ 0.18 $ 0.20
========= ======== ========
Weighted average common shares.......................... 36,940 17,863 14,760
========= ======== ========
Weighted average common shares and dilutive potential
common shares......................................... 48,904 24,032 16,956
========= ============= ========
See the accompanying notes to the consolidated and combined financial statements.
F-4F-7
34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 19962004, 2003 AND 19952002
(IN THOUSANDS)
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED APPRECIATION
SHARES STOCK CAPITAL EARNINGS (DEPRECIATION)
---------- ------ ----------2004 2003 2002
--------- --------------
December 31, 1994..................... 14,760,000 $148 $ 18,551 $ 6,089 $ (1,208)
Net income.......................... -- -- -- 3,469 --
Pre-merger capital contribution from
parent........................... -- -- 595 -- --
Pre-merger dividends paid to
parent........................... -- -- -- (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) --
Change in unrealized appreciation,
net of deferred taxes............ -- -- -- -- 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 -- --
----------- ----- --------- -------- -------
December 31, 1996..................... 33,764,506 338 80,446 6,842 3,696
Net income.......................... -- -- -- 11,530 --
Change in unrealized appreciation,
net of deferred taxes............ -- -- -- -- (2,090)
Reverse merger
Stock issuances..................... 616,611 6 5,261 -- --
Stock options....................... 53,032 1 334 -- --
Warrants............................ 533,032 5 2,819 -- --
Business acquisitions............... 6,496,918 65 38,657 -- --
----------- ----- --------- -------- -------
December 31, 1997..................... 41,464,099 $415 $ 127,517 $18,372 $ 1,606
=========== ===== ========= ======== =======
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 1996 AND 1995
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations............................(loss)........................................ $ 12,76516,051 $ 4,42215,316 $ 3,469(76,848)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of business.................................... (171) -- --
Net lossLoss from operations of discontinued business........... (663) (38) --
Netbusinesses....... 932 1,693 2,130
(Gain) loss on disposal of discontinued business............... (572)businesses.... (132) (726) 2,471
Gain on sale of operations............................ (996) (2,519) (930)
Bad debt expense, net of recoveries................... 4,357 5,002 6,771
Impairment of notes receivable........................ -- 2,394 --
Notes payable extinguishment.......................... (743) -- --
DeprecationCumulative effect of change in accounting principle... -- -- 80,007
Depreciation and amortization................................ 12,282 7,969 8,143amortization......................... 16,428 17,089 20,361
Deferred income taxes....................................... (958) (27) (699)
Cash provided by (used in) changestaxes................................. (2,820) 2,048 3,055
Stock awards.......................................... 449 280 --
Changes in assets and liabilities, net of acquisitions
and dispositions:
Restricted cash....................................... 791 5,968 (3,668)
Accounts receivable, net.................................. (13,437) -- --
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)net.............................. (6,424) (15,296) 884
Other assets.............................................. (6,166) (1,540) (527)assets.......................................... (6,785) (1,614) 1,417
Accounts payable.......................................... 6,069 136 --
Lossespayable...................................... (2,596) 6,462 723
Income taxes.......................................... (6,974) 3,789 (2,653)
Accrued expenses 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 fromother liabilities................ 9,405 (6,788) 4,248
--------- --------- ---------
Net cash provided by continuing operations............... 20,943 33,098 37,968
Net cash (used in) provided by discontinued operations................................. (15,620) -- --
Other, net................................................ 993 (1,693) (2,599)
-------- -------- --------operations... (517) 6,760 4,297
--------- --------- ---------
Net cash provided by operating activities...................... 4,710 13,165 3,602
-------- -------- --------activities................ 20,426 39,858 42,265
--------- --------- ---------
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
Business acquisitions including contingent consideration
earned, net of cash acquired...................... (35,822) 912 --acquired.......................... (5,662) (3,849) (4,553)
Proceeds from dispositions of businesses......................... 10,700 -- --
Acquisition ofdivested operations........................ 3,030 5,590 3,122
Proceeds from discontinued operations.................... 1,549 1,599 4,639
Additions to property and equipment, net....................... (2,284) (286) (223)
-------- -------- --------net................. (8,441) (10,623) (8,107)
Net decrease in notes receivable......................... 195 1,754 1,897
--------- --------- ---------
Net cash used in investing activities.......................... (41,420) (9,261) (2,157)
-------- -------- --------activities............... (9,329) (5,529) (3,002)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Pre-merger dividends paid to parent.............................. -- (1,750) (5,350)
Proceeds from debt............................................... 13,416 -- --
Repayment of debt................................................ (6,233) (836) (295)bank debt.................................. 288,855 225,950 62,600
Proceeds from stock issuances.................................... 5,267 38,237notes payable.............................. -- 324 597
Payment of bank debt..................................... (248,955) (229,450) (100,100)
Payment of notes payable and capitalized leases.......... (428) (1,062) (899)
Payment for acquisition of treasury stock................ (50,419) (33,578) --
Proceeds from exercise of stock options and warrants............. 3,159 -- --
-------- -------- --------options.................. 1,350 927 550
--------- --------- ---------
Net cash provided by (used in)used in financing activities............ 15,609 35,651 (5,645)
-------- -------- --------activities................. (9,597) (36,889) (37,252)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... (21,101) 39,555 (4,200)equivalents....... 1,500 (2,560) 2,011
Cash and cash equivalents at beginning of year..................... 42,249 2,694 6,894
-------- -------- --------year............. 3,791 6,351 4,340
--------- --------- ---------
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................... $ 21,1485,291 $ 42,2493,791 $ 2,694
======== ======== ========6,351
========= ========= =========
See the accompanying notes to the consolidated and combined financial statements.
F-6F-8
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 outsourcedprofessional 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.
Basisnational practices.
Principles of Consolidation
The Company'saccompanying consolidated and combined financial statements includereflect the accountsoperations
of CBIZ and all wholly ownedof its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Accounting Estimates
In preparing theThe accompanying
consolidated and combined financial statements managementdo not reflect the operations or accounts of
variable interest entities as the impact is requirednot material to the financial
condition, results of operations or cash flows of CBIZ. See further discussion
under "Variable Interest Entities" below.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make certain estimates and assumptions that affect the reported amounts of
assets and liabilities, and the disclosuresdisclosure of contingent assets and liabilities as of the date of the consolidated and combined financial statements
and
the reported amounts of revenuesrevenue and expenses forexpenses. Management's estimates and
assumptions include, but are not limited to, estimates of collectibility of
accounts receivable and unbilled revenue, the reporting period.
Actualrealizability of goodwill and
other intangible assets, accrued liabilities (such as incentive compensation),
income taxes and other factors. Management's estimates and assumptions are
derived from and continually evaluated based upon available information,
judgment and experience. However, actual results could differ from those
estimates.
Material estimates that are
particularly susceptible to significant changeReclassifications
Certain amounts in the near-term relate2003 and 2002 consolidated financial statements have
been reclassified to conform to the determination of lossescurrent year presentation. Reclassifications
include: legal settlements (previously reported as other income (expense), net,
which are now reported as corporate general and loss expenses payable, the recoverability of
deferred policy acquisition costs,administrative expense) 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.discontinued operations.
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. At various timesThe
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 and funds on deposit from clients in connection
with the pass through of insurance premiums to the carrier. The related
liability for these funds is recorded in other current liabilities in the
consolidated balance sheets.
Funds Held for Clients and Client Fund Obligations
As part of our payroll and property tax management services, CBIZ is
engaged in the preparation of payroll checks, federal, state, and local payroll
tax returns, property tax payments and flexible spending account
F-9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administration. In relation to these services, CBIZ collects funds from its
clients' accounts in advance of paying these client obligations. Funds that are
collected before they are due are held in an account in CBIZ's name and invested
in short-term investment grade instruments with a maturity of twelve months or
less from the date of purchase. These funds, which may include cash, cash
equivalents and short-term investments, are segregated and reported separately
as funds held for clients. Other than certain federal and state regulations
pertaining to flexible spending account administration, there are no regulatory
or other contractual restrictions placed on these funds. Funds held for clients
and the related client fund obligations are included in the consolidated balance
sheets as current assets and current liabilities, respectively. The amounts of
collected but not yet remitted funds may vary significantly during the year.
Derivative Instruments and Hedging Activities
CBIZ records derivative instruments in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as subsequently
amended by SFAS 137, SFAS 138 and SFAS 149. Derivatives are recognized as either
assets or liabilities in the statement of financial position and are measured at
fair value. The treatment of gains and losses resulting from changes in the fair
values of derivative instruments is dependent on the use of the respective
derivative instruments and whether they qualify for hedge accounting.
In 2001, CBIZ entered into an interest rate swap agreement that qualified
as a cash flow hedge, which was used to manage the interest rate mix of its
credit facility and related overall cost of borrowing. For the year ended
December 31, 2002, the change in fair value relating to CBIZ's hedging activity
resulted in a loss of approximately $0.3 million, which is recorded in
stockholders' equity under accumulated other comprehensive loss. The interest
rate swap was terminated in the third quarter, 2003, and CBIZ did not utilize
derivative instruments during the year the Company had deposits with
financial institutions in excessended December 31, 2004.
Other Financial Instruments
The carrying amount of CBIZ's accounts receivable and accounts payable
approximates fair value because of the $100,000 federally insured limit.
Excessshort maturity of Cost over Netthese instruments. The
carrying value of bank debt approximates fair value, as the interest rate on the
bank debt is variable and approximates current market rates.
Goodwill and Other Intangible Assets
CBIZ utilizes the purchase method of Businesses Acquired
The excessaccounting for all business
combinations, in accordance with Statement of cost overFinancial Accounting Standard No.
141, "Business Combinations" (SFAS 141).
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. CBIZ conducts a formal impairment test of goodwill on
an annual basis, during the fourth quarter of each year, and between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of neta reporting unit below its carrying value.
Other identifiable intangible assets include finite-lived purchased
intangible assets, which primarily consist of businesses acquired
is beingclient lists and non-compete
agreements. These assets are amortized on ausing the straight-line basismethod over their
expected period of benefit, generally two to ten years. In accordance with SFAS
No. 144, "Accounting for the expected periods to be
benefited, which is generally 30 years. It isImpairment or Disposal of Long-Lived Assets", these
assets are reviewed 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 undiscounted future net cash flows expected
to be generated by the asset.
An impairment loss would be recorded in the
period such determination is made based on the fair value of the related
businesses. Amortization expense from continuing operations was approximately
$1,334,000, $33,000 and $0 in 1997, 1996 and 1995, respectively.F-10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the following estimated useful lives.lives:
Buildings................................................ 25 years
Leasehold improvements................................... Contractual term of the lease
Furniture and fixtures................................... 5 to 10 years
Computers, related equipment and software................ 2 to 7 years
Capitalized Software
The cost of software purchased or developed for internal use is capitalized
in accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The costs are
amortized to expense by the straight line method over an estimated useful life
not to exceed seven years. Capitalized software is classified in property and
equipment.
Income Taxes
Income taxes are accountedprovided for under the assettax effects of transactions reported in
the financial statements and liability method.consist of taxes currently due and deferred taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basesbasis and operating loss and tax credit carryforwards. DeferredState income tax assets and
liabilitiescredits
are measured using enacted tax rates expected to apply to taxable
income inaccounted for by the years in which those temporary differences are expected to be
recoveredflow-through method.
A valuation allowance is provided when it is more likely than not that some
portion or settled. The effect onall 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 or carryforward periods, consideration of future deductible
amounts, and liabilitiesassessment of the consolidated and/or separate company
profitability of certain acquired entities.
Revenue Recognition and Valuation of Unbilled Revenues
Revenue is recognized only when all of the following are present:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, our fee to the client is fixed or determinable, and
collectibility is reasonably assured, which is in accordance with GAAP and SAB
104. CBIZ offers a vast array of products and 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.
Certain of our client arrangements encompass multiple deliverables. CBIZ
accounts for these arrangements in accordance with Emerging Issues Task Force
No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables"
(EITF 00-21). If the deliverables meet the criteria in EITF 00-21, the
deliverables are divided into separate units of accounting and revenue is
allocated to the deliverables based on their relative fair values. Revenue for
each unit is recognized separately in accordance with CBIZ's revenue recognition
policy for each unit. For those arrangements where the deliverables do not
qualify as a separate unit of accounting, revenue from all deliverables are
treated as one accounting unit and recognized on a pro-rata basis over the term
of the arrangement.
ACCOUNTING, TAX AND ADVISORY SERVICES -- Revenue consists primarily of fees
for accounting services, preparation of tax returns and consulting services
including Sarbanes-Oxley consulting and compliance projects. Revenues are
recorded in the period in which services are provided and the arrangement meets
revenue recognition criteria in accordance with SAB 104. CBIZ bills clients
based upon a predetermined agreed-upon fixed fee or actual hours incurred on
client projects at expected net realizable rates per hour, plus any out-of-
F-11
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in tax ratesbecomes known.
Through one of its ATA units, CBIZ provides flexible benefits
administration services to clients, grants access of its proprietary software to
third parties, and provides hosting to these parties. Revenue associated with
set up and license fees related to our flexible benefits services are deferred
and recognized pro rata over the life of the contract.
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans. A
description of the revenue recognition, based on the insurance product and
billing arrangement, is described below:
- Commissions relating to brokerage and agency activities whereby CBIZ has
primary responsibility for the collection of premiums from insured's
(agency or indirect billing) are recognized as of the latter of the
effective date of the insurance policy or the date billed to the
customer; commissions to be received directly from insurance companies
(direct billing) are recognized when the policy becomes effective; and
life insurance commissions are recognized when the policy becomes
effective. Commission revenue is reported net of sub-broker commissions.
Commission revenue is reported net of reserves for estimated policy
cancellations and terminations. This reserve is based upon estimates and
assumptions using historical cancellation and termination experience and
other current factors to project future experience. CBIZ periodically
reviews the adequacy of the reserve and makes adjustments as necessary.
The use of different estimates or assumptions could produce different
results.
- Supplemental commissions, which are based upon certain performance
targets, are recognized at the earlier of notification that the target
has been achieved, or cash collection.
- Fee income is recognized in incomethe period in which services are provided and
the arrangement meets revenue recognition criteria in accordance with SAB
104. Fees 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 is recognized on a pro rata basis over the life
of the engagement. Revenue associated with success fee transactions is
recognized when the transaction is completed.
- Technology Consulting -- Revenue associated with hardware and software
sales is recognized upon delivery and acceptance of the product. Revenue
associated with installation and service agreements is recognized as
services are performed. Consulting revenue is recognized on an hourly or
per diem fee basis as services are performed.
- Valuation and Property Tax -- Revenue associated with retainer contracts
is 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 periodcase of a property tax engagement)
acknowledging that includes the enactment date.
Earnings per Common Share
In February 1997,contingency has been resolved.
- Medical Management Group -- Fees for services are primarily based on a
percentage of net collections on our clients' patient accounts
receivable. As such, revenue is determinable, earned, and recognized,
when payments are received on our clients' patient accounts.
Operating Expenses
Operating expenses represent costs incurred by our business units, and
consist primarily of personnel, occupancy and consolidation and integration
related expenses. Personnel costs include base compensation,
F-12
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payroll taxes, and benefits, which are recognized as expense as they are
incurred, and incentive compensation costs which are estimated and accrued on a
monthly basis. The ultimate determination of incentive compensation is made
after our year-end results are finalized; thus, estimates are subject to change.
Total personnel costs were $332.0 million , $319.1 million and $309.9 million
for the Financial Accounting Standards Board issuedyears ended December 31, 2004, 2003, and 2002, respectively.
The largest components of occupancy costs are rent expense and utilities.
Rent expense is recognized over respective lease terms, and utilities are
recognized as incurred. Total facility costs were $35.2 million, $34.8 million
and $34.3 million for the years ended December 31, 2004, 2003, and 2002,
respectively.
Consolidation and integration charges are included in operating expenses,
and are accounted for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128,146, "Accounting for Costs Associated with Exit or Disposal
Activities." Accordingly, CBIZ recognizes a liability for noncancellable lease
obligations based upon the net present value of remaining lease payments, net of
estimated sublease payments. The liability is determined and recognized as of
the cease-use date. Adjustments to the liability are made for changes in
estimates in the period in which the change becomes known. See further
discussion in Note 9.
Variable Interest Entities
Effective January 1, 2004, CBIZ adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
("FIN 46"), FASB Staff Position ("FSP") 46-e, "Effective Date of Interpretation
46", and revisions to FIN 46 ("FIN 46(R)", "FIN 46(R)-1", "FIN 46(R)-2", "FIN
46(R)-3", and "FIN 46(R)-4"). In accordance with the provisions of the
aforementioned standards, CBIZ has determined that its relationship with certain
Certified Public Accounting (CPA) firms with whom we maintain administrative
service agreements (ASAs), qualify as variable interest entities. The
accompanying financial statements do not reflect the consolidation of the
variable interest entities, as the impact is not material to the financial
condition, results of operations or cash flows of CBIZ.
The CPA firms with which CBIZ maintains service agreements operate as
limited liability corporations, limited liability partnerships or professional
corporations. The firms are separate legal entities with separate governing
bodies and officers. CBIZ has no ownership interest in any of these CPA firms,
and neither the existence of the ASAs nor the providing of services thereunder
is intended to constitute control of the CPA firms by CBIZ. CBIZ and the CPA
firms maintain their own respective liability and risk of loss in connection
with performance of each of its respective services, and CBIZ does not believe
that its arrangements with these CPA firms result in additional risk of loss.
Fees earned by CBIZ under the ASAs are recorded as revenue in the
consolidated statements of operations. In the event that accounts receivable and
unbilled work in process become uncollectible by the CPA firms, the service fee
due to CBIZ is reduced on a pro-rata basis. Although the service agreements do
not constitute control, CBIZ is one of the beneficiaries of the agreements and
may bear certain economic risks.
Earnings Per Share. The
Company adopted this standard, as required, for its December 31, 1997 financial
statements. For the years presented, the company presents both basic and diluted
earnings(loss) per share.Share
Basic earnings (loss) per share is computed by dividing net income available to common shareholders(loss)
by the weighted average number of common shares outstanding forduring the period.
Diluted earnings (loss) per share reflectsis computed by dividing net income by weighted
average diluted shares. Weighted average diluted shares are determined using the
weighted average number of common shares outstanding during the period plus the
dilutive effect of potential dilution that could occur iffuture issues of common stock equivalents were exercisedrelating to CBIZ's
stock option programs and then
sharedother potentially dilutive securities. In calculating
diluted earnings (loss) per share, the dilutive effect of stock options is
computed using the average market price for the period in accordance with the
earnings of the Company.
F-8treasury stock method.
F-13
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 Debt
and Equity Securities, all fixed maturity securities that the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and are stated at amortized cost; 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
income is recognized on the accrual basis and dividend income is recognized on
the ex-dividend date.
Deferred Policy Acquisition Costs
Acquisition costs, consisting of commissions, premium taxes and certain
underwriting expenses that vary with and are primarily related to the production
of business, are deferred and amortized ratably over the policy term. The method
used limits the amount to its estimated realizable value which gives effect to
the premium to be earned, the incurrence of loss and loss expenses and certain
other costs expected to be incurred as premium is earned.
Stock Options
Prior to January 1, 1996, the Company accountedBased Awards
CBIZ accounts for its employee stock option plansoptions in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting"Accounting for Stock Issued to Employees, and related interpretations.
As such,Employees."
Accordingly, 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 definedhad been applied
in SFASaccordance with Statement of Financial Accounting Standards No. 123,
had"Accounting for Stock-Based Compensation." Had the cost of stock option plans
been applied. The Company has elected to continue to applydetermined based on the provisionsfair value of APB
Opinion No. 25options at the grant date, CBIZ's net
income (loss) and provide theearnings (loss) per share pro forma disclosure provisionsamounts would be as
follows (amounts in thousands, except per share data):
AS REPORTED PRO FORMA
------------------- -------------------
BASIC DILUTED BASIC DILUTED
-------- -------- -------- --------
2004
Net income.................................. $ 16,051 $ 16,051 $ 14,629 $ 14,629
======== ======== ======== ========
Net income per share........................ $ 0.20 $ 0.20 $ 0.18 $ 0.18
======== ======== ======== ========
2003
Net income.................................. $ 15,316 $ 15,316 $ 14,792 $ 14,792
======== ======== ======== ========
Net income per share........................ $ 0.17 $ 0.17 $ 0.16 $ 0.16
======== ======== ======== ========
2002
Net loss.................................... $(76,848) $(76,848) $(80,365) $(80,365)
======== ======== ======== ========
Net loss per share.......................... $ (0.81) $ (0.79) $ (0.85) $ (0.83)
======== ======== ======== ========
- ---------------
(1) A tax rate of SFAS40.0% was applied to the fair value of options in determining
pro-forma net income for each of the years ended December 31, 2004, 2003 and
2002.
The above results may not be representative of the effects on net income
for future years. CBIZ applied the Black-Scholes option-pricing model to
determine the fair value of each option granted in 2004, 2003 and 2002. Below is
a summary of the assumptions used in the calculation:
2004 2003 2002
----- ----- -----
Risk-free interest rate..................................... 3.89% 2.36% 2.89%
Expected volatility......................................... 36.57% 35.54% 75.76%
Expected option life (in years)............................. 3.75 3.75 3.75
Restricted stock awards are independent of option grants, and are granted
at no cost to the recipients. The market value of shares awarded is recorded as
unearned compensation, and is expensed ratably over the period which
restrictions lapse. See Note 12 to the consolidated financial statements for a
complete description of employee share plans.
Guarantees
CBIZ recognizes a liability for the fair value of obligations undertaken in
issuing guarantees, in accordance with the Financial Accounting Standards Board
issued Interpretation No. 123.
Losses45, "Guarantor's Accounting and Loss Expenses PayableDisclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others", as amended (FIN 45). The liability for losses is provided based upon case basis estimates for
losses reported in respect to direct business; estimatesrecognized at the inception of
unreported losses
based on estimated loss experience; estimates receivedsuch guarantees, and supplemental amounts
provided relating to assumed reinsurance; and deduction for estimated salvage
and subrogation recoverable. The liability for loss expenses is established by
estimating future expenses to be incurred in settlement of the claims provided
forrecorded as other current liabilities in the
liabilityconsolidated balance sheets. See Note 7 for losses. The liability for losses and loss expenses is
not discounted.
Premium Recognition
Premiums are recognized as revenue in proportion to the insurance coverage
provided, which is generally ratable over the terms of the policies. Unearned
premiums are generally computed on the daily pro rata basis and include amounts
relating to assumed reinsurance.
Reinsurance Ceded
In accordance with SFAS No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts, reinsurance receivables are
accounted for and reported separately as assets, net of valuation allowance.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability.
F-9additional disclosures regarding
guarantees.
F-14
39
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Contracts not resulting in the reasonable possibility that the reinsurers may
realize a significant loss from the insurance risk assumed generally do not meet
the conditions for reinsurance accounting2. ACCOUNTS RECEIVABLE, NET
Accounts receivable balances at December 31, 2004 and are accounted for2003 were as deposits.
Reinsurance premiums cededfollows
(in thousands):
2004 2003
-------- --------
Trade accounts receivable................................... $ 82,666 $ 80,650
Unbilled revenue............................................ 33,163 35,089
-------- --------
Total accounts receivable................................. 115,829 115,739
Less allowance for doubtful accounts........................ (6,146) (6,303)
-------- --------
Accounts receivable, net.................................. $109,683 $109,436
======== ========
3. NOTES RECEIVABLE
Notes receivable balances at December 31, 2004 and reinsurance recoveries on claims incurred are
deducted from the respective revenue2003 were as follows (in
thousands):
2004 2003
------ ------
CURRENT
Notes in lieu of cash as consideration for the sale of
operations................................................ $1,125 $1,107
Other....................................................... 252 208
------ ------
Total notes receivable -- current......................... 1,377 1,315
NON-CURRENT
Notes in lieu of cash as consideration for the sale of
operations................................................ 2,169 1,991
Other....................................................... 2,557 442
------ ------
Total notes receivable -- non-current..................... 4,726 2,433
------ ------
Notes receivable.......................................... $6,103 $3,748
====== ======
4. PROPERTY AND EQUIPMENT, NET
Property and expense accounts. The Company is not
relieved of its primary obligation in a reinsurance transaction.
Business Risk
The following is a descriptionequipment, net at December 31, 2004 and 2003 consisted of the
most significant risks facingfollowing (in thousands):
2004 2003
-------- --------
Buildings and leasehold improvements........................ $ 12,697 $ 12,609
Furniture and fixtures...................................... 28,136 25,409
Equipment and capitalized software.......................... 60,338 56,725
-------- --------
Total property & equipment................................ 101,171 94,743
Accumulated depreciation and amortization................... (63,399) (54,648)
-------- --------
Property and equipment, net............................... $ 37,772 $ 40,095
======== ========
Depreciation expense (including amortization of capitalized software) was
approximately $12.5 million, $13.6 million, and casualty insurers and how$15.6 million during the Company mitigates those risks:
Inadequate Pricing Risk is the risk that the premium charged for insurance
and insurance related products are insufficient to cover the costs associated
with the distribution of such products which include: claim and loss costs, loss
adjustment expenses, acquisition expenses, and other corporate expenses. The
Company utilizes a variety of actuarial and other qualitative methods to set
such levels
Adverse Loss Development and Incurred But Not Reported ("IBNR") Risk is the
risk inherent in the handling and settling of claims whose ultimate costs, which
include loss costs, loss adjustment expenses, and other related expenses, are
unknown at the time the claim is presented. An associated risk relates to claims
which have been incurred, but for which the Company has no knowledge. The
Company makes judgments as to the ultimate costs of presented claims and makes a
provision for their future payment by establishing reserves for existing claims
(case reserves) and for IBNR claims, however, there can be no assurance that the
amounts reserved will be adequate to ultimately make all required payments.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will occur and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits or new legal
theories may create costs for the insurer beyond those recorded in the financial
statements. The Company is exposed to this risk by writing approximately 26% of
its business in Ohio and surrounding states and 41% in California, thus
increasing its exposure in these particular regions. This risk is reduced by
underwriting and loss adjusting practices that identify and minimize the adverse
impact of this risk.
Credit Risk is the risk that issuers of securities and mortgagors of the
mortgages owned by the Company will default, or other parties, including
reinsurers that owe the Company money, will not pay. The Company minimizes this
risk by adhering to a conservative investment strategy, by maintaining sound
reinsurance and credit and collection policies, and by providing for any amounts
deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates this
risk by attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities. To the extent that liabilities come due
more quickly than assets mature, an insurer would have to sell assets prior to
maturity and recognize a gain or loss. Management believes that the Company's
positive cash flow from investment income and operations will enable the Company
to operate without having to recognize significant losses from the sale of
investments that have an unrealized holding loss as ofyears
ended December 31, 1997.
Reclassifications
Certain reclassifications have been made to the 19962004, 2003 and 1995 financial
statements to conform to the 1997 presentation.
F-102002, respectively.
F-15
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 businesses5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of 39 complementary companies. These
acquisitions comprised the following: ten accounting systemsgoodwill and tax advisory
businesses, including Comprehensive Business Services, Inc. ("Comprehensive"), a
franchisor of accounting services; eight specialty insurance businesses; four
workers' compensation administration businesses; ten payroll administration/
benefits designother intangible assets, net at December 31,
2004 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")2003 were accounted for
as a purchase, and accordingly, the operating results of the acquired companies
have been included 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 restated for the BMS acquisition as
the transaction 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 beingfollows (in thousands):
2004 2003
-------- --------
Goodwill.................................................... $159,807 $157,815
Intangibles:
Client lists.............................................. 18,033 13,493
Other intangibles......................................... 972 682
-------- --------
Total intangibles...................................... 19,005 14,175
-------- --------
Total goodwill and other intangibles assets................. 178,812 171,990
Less accumulated amortization............................... (6,168) (4,710)
-------- --------
Goodwill and other intangible assets, net................... $172,644 $167,280
======== ========
Client lists are amortized over periods not exceeding 30ten years. As a resultOther
intangibles, which consist primarily of non-compete agreements, are amortized
over periods ranging from two to ten years. Amortization expense (excluding
impairment charges as described below) of client lists and other intangible
assets was approximately $1.8 million, $1.5 million and $2.2 million during the
years ended December 31, 2004, 2003 and 2002, respectively. Amortization expense
for client lists and other intangible assets for each of the naturenext five years is
estimated to be (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2005....................................................... $1,955
======
2006....................................................... $1,811
======
2007....................................................... $1,715
======
2008....................................................... $1,522
======
2009....................................................... $1,428
======
This estimate excludes the impact of the assets 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 throughevents that may occur subsequent to
December 31, 1998. Midwest markets surety bond products throughout2004, including acquisitions, divestitures, and additional purchase
price that may be earned in connection with acquisitions that occurred prior to
December 31, 2004.
In accordance with SFAS No. 144, "Accounting for the United States
through a systemImpairment or Disposal
of approximately 100 independent agentsLong-Lived Assets", CBIZ recorded non-cash pre-tax impairment charges of $0.2
million and subagents. In
conjunction$0.3 million during the years ended December 31, 2004 and 2003,
respectively. The impairment charges are recorded as depreciation and
amortization expense in the accompanying consolidated statements of operations
and relate to client lists from our Accounting, Tax and Advisory, and Benefits
and Insurance practice groups that were purchased in 2000 and 1999,
respectively.
During 2002, in connection with the acquisitionadoption of Midwest's assets, the Century Surety
Group, which has developed the Company's surety bond businessSFAS No. 142, "Goodwill and
Other Intangible Assets," CBIZ recorded a non-cash impairment charge to goodwill
of $88.6 million on a regional
basis overpretax basis. The charge is recorded as a cumulative
effect of a change in accounting principle in the past nine years, entered into a strategic partnership with
Gulf Insurance Companyaccompanying consolidated
statement of New York (a Travelers/Aetna company). Underoperations. Based upon our annual impairment review conducted
during the termsfourth quarter, CBIZ determined there was no impairment 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 networkgoodwill
for the full
range of Century business services.
F-11years ended December 31, 2004 or 2003.
F-16
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.Changes in goodwill for $5.5 million 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 results of operations or of what results would
have been for the combined companies2004 and 2003 were as
follows (in thousands):
UNAUDITED
----------------------
1997 1996NATIONAL
ACCOUNTING, TAX BENEFITS & MEDICAL PRACTICE
AND ADVISORY INSURANCE PRACTICE GROUP- TOTAL
GROUP GROUP MANAGEMENT OTHER GOODWILL
--------------- ---------- ---------- -------- --------
Net revenues
December 31, 2002........ $90,260 $45,206 $17,212 $4,357 $157,035
Additions................ 2,142 810 -- pro forma............................. $188,793 $159,689
======== ========
Net income -- pro forma............................... $ 14,347 $ 10,084
======== ========
Earnings per common share2,952
Divestitures............. (1,035) (1,137) -- pro forma
-- basic....................................... $ 0.35 $ 0.30
======== ========(2,172)
------- ------- ------- ------ --------
December 31, 2003........ 91,367 44,879 17,212 4,357 157,815
Additions................ 772 628 -- diluted..................................... $ 0.27 $ 0.25
========1,219 2,619
Divestitures............. (627) -- -- -- (627)
------- ------- ------- ------ --------
December 31, 2004........ $91,512 $45,507 $17,212 $5,576 $159,807
======= ======= ======= ====== ========
3. EARNINGS PER SHARE
In February 1997,6. INCOME TAXES
A summary of income tax expense (benefit) included in the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. The Company adopted this standard,consolidated
statements of operations is 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
----------- ------------- ---------2004 2003 2002
------- ------- -------
BASIC EARNINGS PER SHARE
IncomeContinuing operations:
Current:
Federal............................................. $ 6,763 $ 8,315 $12,277
State and local..................................... 1,748 1,927 (429)
------- ------- -------
Total current income tax expense from continuing
operations............... $12,765 36,940 $ 0.35
------
Warrants........................................ - 11,721
Options......................................... - 243operations..................................... 8,511 10,242 11,848
Deferred:
Federal............................................. (2,074) 2,352 (4,719)
Foreign............................................. 32 102 30
State and local..................................... (778) (201) 995
------- ------- DILUTED EARNINGS PER SHARE
Income-------
Total deferred income tax expense from continuing
operations plus assumed
conversions................................... $12,765 48,904operations..................................... (2,820) 2,253 (3,694)
------- ------- -------
Total income tax expense continuing operations.... 5,691 12,495 8,154
Discontinued operations.................................. (419) (908) 338
Gain (loss) on sale of discontinued operations........... 266 731 (1,413)
Cumulative effect of change in accounting principle...... -- -- (8,584)
------- ------- -------
Total income tax expense (benefit)....................... $ 0.265,538 $12,318 $(1,505)
======= ======= ------=======
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-17
42
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal statutory
income tax rate to income from continuing operations before income taxes, as
follows (in thousands, except percentages):
FOR THE YEAR ENDED 1995
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------2004 2003 2002
------- ------- ------
BASIC EARNINGS PER SHARE
IncomeTax at statutory rate................................... $ 7,890 $10,072 $5,570
State taxes (net of federal benefit).................... 1,444 1,719 530
Tax credit carryforwards................................ (280) (3,882) --
Change in valuation allowance........................... (707) 4,657 109
Settlement of IRS examination 1998-2000................. (3,550) -- --
Non-deductible goodwill related to divested
businesses............................................ 133 (361) 784
Business meals and entertainment -- non-deductible...... 639 594 554
Other, net.............................................. 122 (304) 607
------- ------- ------
Provision for income taxes from continuing operations...............operations... $ 3,469 14,760 $ 0.24
-------
Warrants........................................ -- 2,1965,691 $12,495 $8,154
======= ======= ======
Effective income tax rate............................... 25.2% 43.4% 51.2%
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities from continuing
operations at December 31, 2004 and 2003, are as follows (in thousands):
2004 2003
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations plus assumed
conversions...................................
Deferred Tax Assets:
Net operating loss carryforwards............................ $ 3,469 16,9565,408 $ 0.20
=======6,206
Allowance for doubtful accounts............................. 2,362 2,371
Reserves and accrued liabilities............................ 4,762 2,165
Cumulative change in accounting principle (SAB 101)......... 2,810 2,895
Goodwill and other intangibles.............................. 4,517 3,943
State tax credit carryforwards.............................. 3,782 3,502
Asset impairment charges.................................... 1,426 1,277
Other deferred tax assets................................... 594 378
------- -------
Total gross deferred tax assets........................... 25,661 22,737
Less: valuation allowance................................. (7,524) (8,231)
------- -------
Net deferred tax assets................................... 18,137 14,506
------- -------
Deferred Tax Liabilities:
Property and equipment...................................... 7,742 6,924
Other deferred tax liabilities.............................. -- 7
------- -------
Total gross deferred tax liabilities...................... 7,742 6,931
------- -------
Net deferred tax asset...................................... $10,395 $ 7,575
======= -------=======
Basic earnings per common share were computed by dividing netDuring the fourth quarter of 2004, the Internal Revenue Service (IRS) made
a final determination relative to its examination of CBIZ's federal income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earning per common sharetax
returns for the years 1997ended December 31, 1998, 1999, and 1996 were determined on2000. The IRS agreed
with CBIZ's favorable tax position, which resulted in an income tax refund of
$4.0 million for the assumption thatyears under examination. At December 31, 2004, this amount
was recorded as income taxes recoverable in the optionsaccompanying consolidated
balance sheet. CBIZ also recorded a deferred tax liability of $1.3 million, and
warrants were exercisedreversed an accrual for income taxes payable of $0.8 million related to the
audit results. These items resulted in a
F-18
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net tax benefit of $3.5 million during the year ended December 31, 2004. The tax
refund was received in February 2005.
CBIZ's U.S. NOL carryforwards arose from the separate return years of
certain acquired entities and are subject to limitations regarding the offset of
CBIZ's future taxable income. Net operating loss (NOL) carryforwards for
continuing operations at December 31, 2004 and 2003 are summarized below (in
thousands). The availability of NOL's is reported as deferred tax assets, net of
applicable valuation allowances, in 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:accompanying consolidated balance
sheets.
1996 1995DEFERRED TAX
NOL CARRYFORWARDS BENEFIT
----------------- --------------- EXPIRATION
2004 2003 2004 2003 DATES
------- ------- ------ ------ ----------
Per share amount
Primary EPS as reported...................................
U.S. NOLs.................................. $ 0.211,940 $ 0.20
Effect of SFAS No. 128.................................... 0.04 0.042,315 $ 679 $ 810 2007
Canadian NOLs.............................. 4,315 4,150 1,726 1,660 2006
State NOLs................................. 60,060 74,720 3,003 3,736 Various
------ ------
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 $ 0.20Total.................................... $5,408 $6,206
====== ======
4. INVESTMENTSCBIZ established valuation allowances for portions of the Canadian and
state NOL carryforwards, state income tax credit carryforwards, and for an asset
impairment charge. The amortized costoverall net change in the valuation allowance for the
year ended December 31, 2004 was a decrease of $0.7 million, due to a decrease
in the valuation allowance for NOL carryforwards.
The net change in the valuation allowance for the year ended December 31,
2003 was an increase of $4.6 million, due to increases in the valuation
allowances for NOL carryforwards of $1.9 million, state tax credit carryforwards
of $2.5 million, and estimatedasset impairment charges of $1.3 million. These increases
were offset by a decrease in the valuation allowance for state deferred taxes
related to an impairment of tax deductible goodwill of $1.1 million.
7. BANK DEBT
Bank debt balances for the years ended December 31, 2004 and 2003 were as
follows (in thousands, except percentages):
2004 2003
-------------- --------------
Bank debt:
Revolving credit facility......................... $ 53,900 $ 14,000
============== ==============
Weighted average rates............................ 3.54% 4.39%
============== ==============
Range of effective rates.......................... 2.98% - 5.25% 3.08% - 5.58%
============== ==============
Effective August 9, 2004, CBIZ modified its credit facility increasing the
total commitment from $73.0 million to $100.0 million, with an option to
increase the commitment to $125.0 million. The modified facility provides CBIZ
additional operating flexibility and funding to support seasonal working capital
needs and other strategic initiatives such as acquisitions and share
repurchases.
The credit facility is maintained with Bank of America as agent bank for a
group of five participating banks and has a five year term expiring August 2009.
The credit facility is secured by substantially all assets and capital stock of
CBIZ and its subsidiaries. Management believes that the carrying amount of bank
debt approximates its fair value, and CBIZ had approximately $17.4 million of
available funds under the facility at December 31, 2004.
Under the facility, loans are charged an interest rate consisting of a base
rate or Eurodollar rate plus an applicable margin. Additionally, a commitment
fee of 30 to 45 basis points is charged on the unused portion of
F-19
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the facility. The borrowing base calculation required under the previous
facility is not required under the current facility; however, the current
facility is subject to certain financial covenants, that may limit CBIZ's
ability to borrow up to the total commitment amount.
The bank agreement contains financial covenants and restrictions which are
similar to those under the previous facility. Covenants require CBIZ to meet
certain requirements with respect to (i) minimum net worth; (ii) maximum
leverage ratio; and (iii) a minimum fixed charge coverage ratio. Limitations are
also placed on CBIZ's ability to acquire businesses, repurchase CBIZ common
stock and to divest operations. As of December 31, 2004, CBIZ was in compliance
with its covenants.
The bank agreement also places restrictions on CBIZ's ability to create
liens or other encumbrances, to make certain payments, investments, loans and
guarantees and to sell or otherwise dispose of a substantial portion of assets,
or to merge or consolidate with an unaffiliated entity. According to the terms
of the agreement, CBIZ is not permitted to declare or make any dividend
payments, other than dividend payments made by one of its wholly owned
subsidiaries to the parent company. The agreement contains a provision that, in
the event of a defined change in control, the agreement may be terminated.
CBIZ provides letters of credit to landlords (lessors) of its leased
premises in lieu of security deposits. Letters of credit under the credit
facility were $2.9 million and $3.2 million as of December 31, 2004, and
December 31, 2003, respectively. CBIZ also acted as guarantor on three letters
of credit for a CPA firm with which it has an affiliation. The letters of credit
total $1.3 million and $0.7 million as of December 31, 2004, and December 31,
2003, respectively. In accordance with FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," as amended, CBIZ has recognized
a liability for the fair value of fixed maturities heldthe obligations undertaken in issuing these
guarantees, which is recorded as other current liabilities in the accompanying
consolidated financial statements. Management does not expect any material
changes to maturity atresult from these instruments as performance is not expected to be
required.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
CBIZ leases certain of its office facilities and equipment under various
operating leases. At December 31, 19972004, non-cancelable, future minimum rental
commitments becoming payable under operating leases were as follows (in
thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------YEARS ENDED DECEMBER 31,
- ------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies...........2005........................................................ $ 6,971 $ 47 $ 17 $ 7,001
Corporate securities................... 6,810 14 34 6,790
Foreign corporate bonds................ 317 16 -- 333
Mortgage-backed securities............. 430 8 -- 438
------- ---- ---- -------
Totals.............................. $14,528 $ 85 $ 51 $ 14,562
======= ==== ==== =======30,036
2006........................................................ 25,515
2007........................................................ 21,427
2008........................................................ 18,884
2009........................................................ 15,524
Thereafter.................................................. 66,537
--------
Total..................................................... $177,923
========
F-13Total rental expense incurred under operating leases was $31.7 million,
$29.8 million, and $27.6 million during the years ended December 31, 2004, 2003,
and 2002, respectively.
F-20
43
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Capital Leases
CBIZ leases furniture and fixtures for certain office facilities under
various capital lease agreements. Depreciation of furniture and fixtures
acquired under capital lease agreements is reported as depreciation and
amortization expense in the accompanying consolidated statement of operations.
The amortized costfollowing is a summary of property under capital leases, that is included in
property and estimated fair value of securities available for
saleequipment, net in the accompanying consolidated balance sheets at
December 31, 19972004 and 2003 (in thousands):
2004 2003
------ -----
Furniture and fixtures...................................... $2,031 $ 174
Accumulated depreciation.................................... (321) (159)
------ -----
Furniture & fixtures, net................................. $1,710 $ 15
====== =====
Future minimum lease payments under the capital leases and the present
value of such payments at December 31, 2004 were as follows:
YEARS ENDED DECEMBER 31,
- ------------------------
2005........................................................ $ 429
2006........................................................ 428
2007........................................................ 428
2008........................................................ 385
2009........................................................ 9
Thereafter.................................................. --
------
Total minimum lease payments................................ 1,679
Less imputed interest....................................... (129)
------
Present value of minimum lease payments................... $1,550
======
Legal Proceedings
The Company has entered into settlements to resolve the Heritage Bond
Litigation, comprised of multiple lawsuits pending in the Central District of
California arising from losses sustained by investors in numerous municipal bond
offerings between December 1996 and March 1999. In those lawsuits, plaintiffs
alleged numerous claims, including mismanagement and misappropriation of funds
from the bond offerings, against unrelated parties, including the Heritage
Entities and the trustee, U.S. Trust Corp. The Betker Action, CV 02-5752-DT
(RCx), includes claims against two entities acquired by the Company, Valuation
Counselors Group, Inc. ("VC") and Zelenkofske, Axelrod & Co., Ltd. ("ZA"), for
negligent misrepresentation and negligence, and for joint and several liability
under California Corporations Code sec. 25504.2 (against VC only). In the
Consolidated Class Action, 02-ML-1475-DT (RCx), the Court permitted plaintiffs
to substitute CBIZ Valuation Group, Inc. ("CBIZ-VC") in place of VC, and CBIZ
Accounting, Tax & Advisory, Inc. ("CBIZ-ZA") in place of ZA, as defendants. In
addition, plaintiffs named Century Business Services, Inc. ("CBIZ") itself as a
defendant. CBIZ-VC and CBIZ-ZA are subsidiaries of CBIZ. That complaint includes
claims against CBIZ, CBIZ-VC and CBIZ-ZA for negligence, and claims against
CBIZ-VC and CBIZ-ZA for conspiracy to commit fraud, negligent misrepresentation
and intentional misrepresentation. These claims have been pending since 2001 and
relate to the provision of valuation and feasibility study services from 1996
through 1999. Management believes that the settlements are fair, reasonable and
adequate, and in the best interests of all parties concerned. The settlement of
the Consolidated Class Action has been preliminarily approved by the Court,
which also entered an order approving notice to the Class. The Class Settlement
is conditioned upon, among other things, standard class action opt-out
procedures, objections by litigants, the Court's entry of a bar order and final
judicial approval of
F-21
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the settlement by the Court after notice to the class. The settlement of the
Betker Action has been approved by the Court and is subject to, among other
things, the final entry of a bar order. Additional proceedings may be necessary
as a consequence of any opt-out or objection that may occur. The resolution of
these matters did not have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.
In addition to those items disclosed above, 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.
9. CONSOLIDATION AND INTEGRATION RESERVE
Consolidation and integration charges are comprised of expenses associated
with the Company's on-going efforts to consolidate fragmented markets to allow
for convenient delivery of services to clients, and to promote cross-serving
between various practice groups. These expenses result from individual actions
in several markets and are not part of one company-wide program. Consolidation
and integration charges include costs for moving facilities, non-cancelable
lease obligations, severance obligations, and other expense-reduction
initiatives.
During 2004, CBIZ incurred consolidation and integration charges of
approximately $1.0 million related to real estate leasing costs in the Chicago
market. Other consolidation and integration initiatives during 2004 were
individually insignificant. During 2003, CBIZ initiated the consolidation of
offices in Orange County, California, and Cleveland, Ohio, which resulted in
$0.5 million of costs for non-cancelable lease obligations and moving expenses.
In addition, CBIZ continued the consolidation in the Kansas City market, which
was initiated in 2002. During 2002, CBIZ recognized $1.7 million of costs for
consolidations in Kansas City, related to non-cancelable lease obligations.
Consolidation and integration reserve balances at December 31, 2004, 2003
and 2002, and activity during the years ended December 31, 2004 and 2003 were as
follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------CONSOLIDATION AND
INTEGRATION RESERVE
-------------------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies...........Reserve balance at December 31, 2002........................ $ 7,6816,740
Adjustments against income (1)............................ 447
Payments.................................................. (2,330)
-------
Reserve balance at December 31, 2003........................ 4,857
Adjustments against income (1)............................ 1,565
Payments.................................................. (3,012)
-------
Reserve balance at December 31, 2004........................ $ 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
======= ====== ====3,410
=======
Expected maturities will differ from contractual maturities because- ---------------
(1) Adjustments against income are included in operating expenses in the
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized costaccompanying consolidated statements of operations.
F-22
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidation and estimated fair value of fixed
maturities held to maturity atintegration charges incurred for years ended December 31,
1997, by contractual maturity,2004, 2003 and 2002, and recorded as operating expenses in the accompanying
consolidated statements of operations 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-14
44
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
--------- ---------- ---------- ----------2004 2003 2002
------ ------ ------
U.S. Treasury securitiesSeverance expense.......................................... $ 9 $ 332 $ (66)
Lease consolidation and obligations
of U.S. government corporationsabandonment........................ 2,502 1,086 3,290
Other consolidation charges................................ 348 550 465
------ ------ ------
Total consolidation 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
======= ==== ==== =======integration charges................ $2,859 $1,968 $3,689
====== ====== ======
The amortized cost and estimated fair value10. EMPLOYEE BENEFITS
Employee Savings Plan
CBIZ sponsors a qualified 401(k) defined contribution plan that covers
substantially all 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 comprisedits employees. Participating employees may elect to
contribute (subject to a maximum permissible contribution under Section 401(k)
of the following forInternal Revenue Code), on a tax-deferred basis, up to 80% of their
pre-tax annual compensation. Matching contributions by CBIZ are 50% of the first
6% of base compensation that the participant contributes, and additional amounts
may be contributed at the discretion of the Board of Directors. Participants may
elect to invest their retirement funds in various stock, fixed income, stable
value, and balanced - lifecycle funds. Employer contributions (net of
forfeitures) made to the plan during the years ended December 31, 2004, 2003 and
2002, were approximately $5.2 million, $5.1 million, and $5.3 million,
respectively.
Deferred Compensation Plan
CBIZ implemented a deferred compensation plan during the first quarter of
2004, under which certain members of management and other highly compensated
employees may elect to defer receipt of a portion of their annual compensation,
subject to maximum and minimum percentage limitations. The amount of
compensation deferred under the plan is credited to each participant's deferral
account and a deferred compensation liability is established by CBIZ. An amount
equaling each participant's compensation deferral is transferred into a rabbi
trust and invested in various debt and equity securities. The assets of the
rabbi trust are held by CBIZ and recorded 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-15
45
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Realizedassets of deferred compensation
plan in the accompanying consolidated balance sheets.
Assets of the deferred compensation plan consist primarily of investments
in mutual funds, money market funds and equity securities. The values of these
investments are based on published market quotes at the end of the period.
Adjustments to the fair value of these investments are recorded as other income
(expense), offset by adjustments to operating expenses in the consolidated
statement of operations. Gross realized and unrealized gains and losses onfrom
trading securities have not been material. These investments are specifically
designated as available to CBIZ solely for the years 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)purpose 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 31 were as follows (in thousands):
1997 1996 1995
------- ------- -------
Gross unrealized appreciation................... $ 2,224 $ 5,214 $ 4,485
Deferred income tax............................. (618) (1,518) (1,219)
------- ------- -------
Net unrealized appreciation................... $ 1,606 $ 3,696 $ 3,266
======= ======= =======
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 propertiespaying benefits under
the deferred compensation plan. However, in the statesevent that CBIZ became
insolvent, the investments would be available to all unsecured general
creditors.
The deferred compensation liability relates to obligations due to
participants under the plan. The deferred compensation liability balance
represents accumulated participant deferrals, and earnings thereon, since the
inception of California, Michiganthe plan, net of withdrawals. The deferred compensation liability
is an unsecured general obligation of CBIZ, 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 reportedis recorded as liabilities of
deferred compensation plan in the accompanying 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-16
46
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
values for fixed maturities available for sale and equity securities are
recognized in the consolidated and combined balance sheets.
Mortgage loans: The carrying amounts reported in the consolidated and
combined balance sheets are the aggregate unpaid balance of the loans,
which approximates fair value.
5.11. COMMON STOCK
The Company'sCBIZ's authorized common stock consists of 100,000,000250 million shares of common
stock, par value $0.01 per share.share (Common Stock). The holders of the Company'sCBIZ's Common
Stock are entitled to one vote for each share held on all
F-23
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Star Bank, N.A.
In June 1997, the Company completed theComputershare Investor
Services, LLC.
CBIZ 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. Currently, CBIZ has registered 15
million shares of certain selling shareholdersour Common Stock, all of which remain available to be offered
from time to time in orderconnection with acquisitions under our acquisition shelf
registration statement.
Treasury Stock
In March 2004, CBIZ's Board of Directors authorized share repurchases of up
to permit8.5 million shares of CBIZ common stock. A supplement to the public or
private sale or other public or private distributionplan was
approved by the Board of the Shares. Accordingly,
the Company will not receive any proceedsDirectors in May 2004, authorizing CBIZ to purchase an
additional 2.0 million shares of CBIZ common stock, for these Shares.a total of 10.5 million
shares. In April 1997, the Company2004, CBIZ completed a private placementtender offer that resulted in which the
Company sold an aggregatepurchase of 616,611 units (the "Units") to qualified investorsapproximately 7.5 million shares of CBIZ common stock, at a purchase
price of $5.00 per share, or a total cost (including legal and other direct
expenses) of approximately $37.8 million. During the year ended December 31,
2004, CBIZ also repurchased approximately 2.9 million shares of its common stock
in the open market, at an aggregate purchase price of $9.00 per Unit. Each Unit consistedapproximately $12.6
million. The repurchase plan expired December 31, 2004.
In June 2003, CBIZ's Board of oneDirectors authorized a share repurchase of up
to 15.0 million shares of CBIZ common stock and one warrant(not to exceed $52.5 million). In
July 2003, CBIZ completed a modified Dutch Auction tender offer which resulted
in the purchase one share of approximately 10.0 million shares of CBIZ common stock at an exercisea
purchase price of $11.00$3.30 per share, exercisable foror a three year period from
the date of issuance. The Company realized net proceedstotal cost (including legal and other
direct expenses) of approximately $5,300,000.
In January 1997,$33.2 million. During the Company completed the registration of 32,126,076year ended December
31, 2003, CBIZ also repurchased 104,000 shares of its common stock (the "Shares") of which up to 17,925,888 are issuable
upon exercise of outstanding warrants. The Shares were registered underin 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 distribution of the
Shares. Accordingly, the Company will not receive any proceeds for these Shares.
In December 1996, the Company completed a private placement in which the
Company offered 3,251,888 units (the "Units") to qualified investorsopen
market, at an aggregate purchase price of $9.00 per Unit. Each Unit consistedapproximately $0.4 million. The
repurchase plan expired December 31, 2003.
Repurchased shares are held in treasury, and may be reserved for future use
in connection with acquisitions, employee share plans and other general
purposes. The repurchase plans allow CBIZ to purchase shares through the open
market or through privately negotiated purchases. The repurchase programs do not
obligate CBIZ to acquire any specific number of one shareshares and may be suspended at
any time. Repurchases are subject to annual dollar and financial ratio
limitations under our current credit facility. At December 31, 2004, CBIZ was in
compliance with this covenant.
Warrants
In 1999, CBIZ issued 1.8 million restricted shares of common stock and
one warrant900,000 warrants to purchase one share ofan outside party for a $25.0 million equity investment in
CBIZ. The restrictions on the common stock expired in 2001, and the warrants
were exercisable under the following terms: 300,000 shares for three years at
an
exercise price of $11.00$20.00 per share, exercisableshare; 300,000 shares 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 sharesfour years at $25.00 per share; and 300,000
for five years at $30.00 per share. All of the Company's
Common Stock and warrants to purchase an additional 12,000,000 shareshave expired as 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 warrants in connection with certain acquisitions made
during the year. Portions of these warrants are restricted from being
transferred in accordance with various Lock-Up agreements between the former
shareholders of the acquired entities and the Company. The last restriction on
transferring these locked-up warrants expires in April 2000.
F-17December 31, 2004.
F-24
47
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RESI agreedInformation relating to issue to holders of unexpired warrants of its former parent,
additional RESI warrants to acquirepurchase common stock is summarized
below (in thousands):
2004 2003 2002
---- ---- ------
Outstanding at beginning of year............................ 300 600 1,800
Granted /issued............................................. -- -- --
Expired/cancelled........................................... (300) (300) (1,200)
Exercised................................................... -- -- --
---- ---- ------
Outstanding at end of year (a).............................. -- 300 600
==== ==== ======
Exercisable at end of year (a).............................. -- 300 600
==== ==== ======
- ---------------
(a) Exercise prices for warrants outstanding and exercisable at December 31,
2003 were $30.00. Exercise prices for warrants outstanding and exercisable
at December 31, 2002 ranged from $25.00 to $30.00.
12. EMPLOYEE SHARE PLANS
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 RESI's Common Stock equalCBIZ's
common stock. Participation in the plan is open to one
fifthall 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 numbershares. CBIZ does not provide a
discount to employees for the purchase 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'sCBIZ common stock.
These warrants are designated as stapled warrants and expire at various dates
through December 2000. In connection with the RESI Transaction, the holders of
these warrants are able to exercise under the original terms of the warrants and
will receive Company stock.
At December 31, 1997 there were outstanding unexercised warrants to acquire
22,379,387Participants may also purchase shares of the Company's commonCBIZ stock of which 20,573,053 were
exercisable at prices ranging from $1.075 to $13.06. The remaining 1,806,334
warrants are restricted from transferby making optional cash
investments in accordance with various Lock-Up
agreements discussed above. At December 31, 1996 there were outstanding
unexercised warrants to acquire 20,785,888 sharesthe provisions of the Company's commonplan. Shares of CBIZ stock
purchased by participants in the plan may be treasury or new issue stock, or at
prices rangingCBIZ's option, CBIZ stock purchased in the open market or negotiated
transactions. Treasury or new issue stock is purchased from $1.075 to $11.00.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.
Stock Options
Under the 1997 Agents 1997 Stock Option Plan, a maximum of 1,200,0001.2 million 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. TheThese options terminateterminated in July 2002, or earlier under
certain conditions, including termination of the agency agreement.June 2002.
Under the 1996 Employee Stock Option Plans,Plan, a maximum of 1,000,00015.0 million
options may be awarded. The options awarded are subject to a 20% incremental
vesting schedule over a five-year period commencing from the date of grant. The
options are awarded at a price not less than fair market value at the time of
the award and expire six years from the date of grant. Further, under the 1996
plan 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 resultThe 2002 Stock Incentive Plan is an amendment and restatement of the sale1996
Employee Stock Option Plan. A maximum of RESI15.0 million shares may be awarded,
which number shall include those shares that are available for grants under the
prior plan. Stock options, restricted stock and other stock based compensation
awards may be made under the plan. Total shares available for future grant under
the plan were approximately 5.3 million, 4.4 million and 4.0 million at December
31, 2004, 2003 and 2002, respectively.
F-25
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options may be granted alone or in July 1997,addition to other awards granted
under the plan and may be of two types: incentive stock options and nonqualified
stock options. The options awarded under this plan are subject to a 20%
incremental vesting schedule over a five-year period commencing from the 1995 Employee Stock Option Plan becamedate of
grant. At the discretion of the Compensation Committee of the Board of
Directors, the options may vest immediately, vested and exercisable. Theseor in a time period shorter than
five years. The options which expire in July 1998, remain vested as long as the optionee is
employed by the former parent, RESI or their affiliates. The optionare awarded at a price is
based on thenot less than fair market value
at the time of the common shares on the grant date.
Prior to the RESI Transaction, certain options were granted to employees,
directorsaward 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. 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 onsix years from the date of grant. In the
event the optionee of an incentive stock option owns, at the time such stock
option is awarded or granted, more than ten percent (10%) of the voting power of
all classes of stock of CBIZ, the option price shall not be less than 110% of
such fair market value.
Information relating to the stock option plans is summarized below:below (in
thousands, except per share data):
1997 1996WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PER PRICE PER PRICE PER
2004 SHARE 2003 SHARE 2002 SHARE
------ --------- -------------- --------- ------ ---------
Outstanding at beginning of
year......................... 317,072 190,200
Granted10,155 $ 4.58 10,952 $4.81 9,652 $5.49
Granted........................ 473 $ 4.31 558 $3.12 2,684 $3.44
Exercised (a).............................................. 1,870,500 230,000
Exercised (b)............................................ (53,032) (101,960).................. (519) $ 2.60 (375) $2.47 (242) $2.27
Expired or canceled...................................... (74,000) (1,168)
--------- ---------canceled............ (1,586) $11.98 (980) $7.19 (1,142) $7.40
------ ------ ------
Outstanding at end of year (c)...................... 2,060,540 317,072
--------- ---------year..... 8,523 $ 3.32 10,155 $4.58 10,952 $4.81
====== ====== ======
Exercisable at end of year (d)...................... 567,640 22,320
========= =========
Available for future grant atyear..... 5,390 $ 3.46 5,764 $5.64 4,257 $6.67
====== ====== ======
Weighted average fair value of
options granted during the
end of year............ 342,500 273,000
========= =========year......................... $ 1.42 $0.95 $1.94
F-18- ---------------
(a) Options were exercised at prices ranging from: $1.07 to $3.45 in 2004, $1.53
to $3.45 in 2003, and $1.53 to $3.41 in 2002.
Information about stock options outstanding at December 31, 2004 is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------------------- ----------- ------------ -------- ----------- --------
$5.01 - $14.38.............. 538 0.1 $13.82 529 $13.90
$3.00 - $ 5.00.............. 4,158 2.8 $ 3.55 2,069 $ 3.46
$1.13 - $ 2.99.............. 3,827 2.4 $ 1.59 2,792 $ 1.49
----- -----
Total....................... 8,523 2.4 $ 3.32 5,390 $ 3.46
===== =====
Restricted Stock Awards
Under the 2002 Stock Incentive Plan (described above), certain employees
and non-employee directors were granted restricted stock awards. Restricted
stock awards are independent of option grants, and are granted at no cost to the
recipients. The awards are subject to forfeiture if employment terminates prior
to the release of restrictions, generally one to five years from the date of
grant. Recipients of restricted stock awards are entitled to the same dividend
and voting rights as holders of other CBIZ common stock. However, shares granted
under the plan cannot be sold, pledged, transferred or assigned during the
vesting period.
F-26
48
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Options wereDuring 2004, CBIZ granted at average costs of $11.69 and $2.31 in 1997 and 1996,
respectively.
(b) Options were exercised119,000 restricted stock awards, at prices
ranging from $1.08$4.30 to $2.31$4.58, and averaging $1.68 in 1997$4.35. The market value of shares
awarded during 2004 was $0.5 million and $1.08was recorded as unearned compensation.
Unearned compensation is being expensed ratably over the period which
restrictions lapse and amounted to $3.60 and averaging $3.43 in 1996.
(c) Prices for options outstanding at$0.1 million during the year ended December
31, 1997 ranged2004. Awards will be released from $1.08 to
$12.50 and averaged $10.49 with expirationrestrictions at dates ranging from
July 1998 to
October 2003. Prices for options outstanding atFebruary 2005 through May 2009. As of December 31, 1996 ranged2004, none of the awards have
been forfeited, vested, or released from $1.08 to $4.10restriction.
13. EARNINGS PER SHARE
CBIZ presents both basic and averaged $2.11 with expiration dates ranging from
May 1996 to May 2004.
(d) Options exercisable atdiluted 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 dilutive potential common shares (in thousands,
except per share data).
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
2004 2003 2002
------- ------- --------
NUMERATOR:
Net income (loss)....................................... $16,051 $15,316 $(76,848)
======= ======= ========
DENOMINATOR:
BASIC
Weighted average common shares.......................... 79,217 90,400 94,810
------- ------- --------
DILUTED
Options................................................. 2,240 2,362 2,182
Restricted stock awards................................. 18 -- --
Contingent shares (1)................................... 2 -- --
------- ------- --------
Total diluted weighted average common shares.......... 81,477 92,762 96,992
======= ======= ========
Basic net income (loss) per share....................... $ 0.20 $ 0.17 $ (0.81)
======= ======= ========
Diluted net income (loss) per share..................... $ 0.20 $ 0.17 $ (0.79)
======= ======= ========
- ---------------
(1) Contingent shares represent shares that will not be issued until future
conditions have been met.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid (received) for interest and income taxes during the years ended
December 31, 19972004, 2003 and 1996 averaged $7.11 and $2.18,
respectively.
Had the cost of stock option plans been determined based on the provision
of SFAS No. 123, the Company's net income and earnings per share pro forma
amounts would be2002 was as follows (in thousands):
(UNAUDITED)
AS REPORTED PRO FORMA
------------------ ------------------
BASIC DILUTED BASIC DILUTED2004 2003 2002
------- ------- ------- -------------
1997
Net income............................ $11,530.. $11,530 $11,198 $11,198Interest.................................................. $ 1,342 $ 1,045 $2,521
======= ======= ======
Income taxes.............................................. $14,675 $(2,262) $4,323
======= ======= Net income per common share........... $ 0.31 $ 0.24 $ 0.30 $ 0.23
======= ======= ======= =======
1996
Net income............................ $ 4,384 $ 4,384 $ 4,358 $ 4,358
======= ======= ======= =======
Net income per common share........... $ 0.25 $ 0.18 $ 0.24 $ 0.18
======= ======= ======= =======
1995
Net income............................ $ 3,469 $ 3,469 $ 3,468 $ 3,468
======= ======= ======= =======
Net income per common share........... $ 0.24 $ 0.20 $ 0.23 $ 0.20
======= ======= ======= =============
The above results may not be representative of the effects of SFAS No. 123
on net income for future years.
The Company applied the Black-Scholes option-pricing model to determine the
fair value of each option granted in 1997, 1996 and 1995. Below is a summary of
the assumptions used in the calculation:
1997 1996 1995
----- ----- -----
Risk-free interest rate.............................. 6.01% 6.03% 6.21%
Dividend yield....................................... -- -- --
Expected volatility.................................. 35.00% 35.00% 35.00%
Expected option life (in years)...................... 3.75 3.75 3.75
The stock options issued to key employees in 1996 were assumed to vest at a
rate of 100%.
F-19F-27
49
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity inSupplemental Disclosures of Non-Cash Investing and Financing Activities
Non-cash investing and financing activities during the liability for unpaid lossesyears ended December
31, 2004, 2003 and loss expenses is summarized2002 were as follows (in thousands):
1997 1996 1995
------- ------- -------2004 2003 2002
------ ------ ------
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 $37,002
======= ======= =======Property and equipment acquired under capital lease
obligations.............................................. $1,857 $ -- $ 10
====== ====== ======
Business acquisitions, including contingent consideration
earned................................................... $3,854 $5,006 $ --
====== ====== ======
Non-cash proceeds from divested operations................. $1,865 $ 207 $4,041
====== ====== ======
Non-cash proceeds from discontinued operations............. $ 530 $ 494 $ 194
====== ====== ======
Non-cash consideration paid for business acquisitions and proceeds received
from divested operations were generally in the form of notes receivable, notes
payable and CBIZ common stock.
15. RELATED PARTIES
The following is a summary of certain agreements and transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
CBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
properties owned indirectly by and leased from persons employed by CBIZ. In 1997the
aggregate, CBIZ paid approximately $1.3 million, $1.4 million, and 1995,$0.8 million
for the Company experienced lower than anticipated ultimate
losses on prior years due primarily to a reduction in claims severity from that
assumed in establishing the liability for lossesended 2004, 2003 and loss expenses payable. The
Company's environmental exposure from continuing operations relates primarily to
its coverage of remediation related risks, thus2002, respectively, under such leases which
management believes were at market rates.
Rick L. Burdick, a director of CBIZ, is a partner of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump.) Akin, Gump performed legal work for CBIZ
during 2004, 2003 and 2002 for which the Company's exposurefirm received approximately $0.2
million, $0.2 million, and $0.1 million from CBIZ, respectively.
Robert A. O'Byrne, a Senior Vice President, has an interest in a
partnership that receives commissions from CBIZ that are paid to historic pollution situationscertain
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 program was in existence at the time CBIZ acquired the former
company, of which Mr. O'Byrne was an owner.
CBIZ maintains joint-referral relationships and administrative service
agreements with independent licensed CPA firms under which CBIZ provides
administrative services in exchange for a fee. These firms are owned by licensed
CPAs who are employed by CBIZ subsidiaries, and provide audit and attest
services to clients including CBIZ's clients. The CPA firms with which CBIZ
maintains service agreements operate as limited liability corporations, limited
liability partnerships or professional corporations. The firms are separate
legal entities with separate governing bodies and officers. CBIZ has no
ownership interest in any of these CPA firms, and neither the existence of the
administrative service agreements nor the providing of services thereunder is
minimal. The Company's
non-insurance environmental exposure from discontinued operationsintended to constitute control of the CPA firms by CBIZ. CBIZ and the CPA firms
maintain their own respective liability and risk of loss in connection with
performance of each of its respective services, and CBIZ does not believe that
its arrangements with these CPA firms result in additional risk of loss.
Although the service agreements do not constitute control, CBIZ is discussedone of the
beneficiaries of the agreements and may bear certain economic risks. As such,
the CPA firms with which CBIZ maintains administrative service agreements
qualify as variable interest entities under FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". See further discussion in Note 15.
7. REINSURANCE
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurers and reinsurers. These arrangements provide the
Company with a greater diversification of business and generally limit the
maximum net loss potential on large risks. Excess of loss reinsurance contracts
in effect through December 31, 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-201.
F-28
50
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CBIZ acted as guarantor on various letters of credit for a CPA firm with
which it has an affiliation. The impactletters 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, $2,869,000credit total $1.3 million and $2,259,000 at
December 31, 1997, 1996 and 1995, respectively.
Reinsurance recoverables were comprised of the following$0.7
million as 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
======= ======= =======
2004, and December 31, 2003, respectively. In
accordance with FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and its amendments ("FIN 45-1" and "FIN 45-2"), CBIZ has
recognized a liability for the fair value of the obligations undertaken in
issuing these guarantees, which is recorded as other current liabilities in the
accompanying consolidated financial statements. Management does not expect any
material changes to result from these instruments as performance is not expected
to be required.
In 2002, CBIZ executed a note receivable with a CPA firm whose partner
group has since joined MHM, PC, a CPA firm with which CBIZ maintains an
administrative services agreement. The Company evaluatesbalance on 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 followsnote 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-212004
and 2003 was approximately $0.2 million and $0.2 million, respectively.
CBIZ divested several operations during the years ended December 31, 2004,
2003, and 2002, that were underperforming, located in secondary markets, or did
not provide the level of synergistic cross-serving opportunities with other CBIZ
businesses that was desired. CBIZ has sold and may sell in the future businesses
to former employees or shareholders. Management believes these transactions were
priced at market rates, competitively bid, and entered into at arm's length
terms and conditions.
16. ACQUISITIONS
During the year ended December 31, 2004, CBIZ completed acquisitions of
benefits and insurance firms in Chicago, Illinois, and Owing Mills, Maryland, as
well as an accounting tax and advisory firm in Denver, Colorado, and a
technology firm in Cleveland, Ohio which is reported as part of our National
Practices -- Other segment. Aggregate consideration for the acquisitions
consisted of approximately $3.7 million cash and 215,500 shares of restricted
common stock (estimated stock value of $1.0 million at acquisition) paid at
closing, and up to an additional $8.0 million (payable in cash and stock) which
is contingent on the businesses meeting certain future revenue and earnings
targets.
In addition to the businesses acquired during 2004, CBIZ purchased three
client lists which compliment our National Practices -- Other segment. The
purchase price of the client lists is primarily dependent upon future results,
and is not expected to be material individually or in the aggregate.
During the year ended December 31, 2003, CBIZ completed the acquisition of
benefits and insurance firms in Boca Raton, Florida and Salt Lake City, Utah, as
well as accounting, tax & advisory firms in Orange County, California and
Stamford, Connecticut. In addition to the acquisitions of these businesses, CBIZ
purchased the client lists of four benefits agencies. The aggregate purchase
price of these acquisitions and client lists was approximately $11.2 million,
comprised of $2.8 million in cash and 177,000 shares of restricted common stock
(estimated stock value of $0.3 million at acquisition) paid at closing, $2.1
million of notes contributed, and up to an additional $6.0 million payable in
cash which is contingent on the businesses meeting certain future revenue
targets.
During 2002, CBIZ acquired a benefits and insurance firm located in
Calverton, Maryland for an aggregate purchase price of approximately $4.1
million in cash.
The operating results of these firms and client lists have been included in
the accompanying consolidated financial statements since the dates of
acquisition. Client lists and non-compete agreements were recorded at fair value
at the time of acquisition. The excess of purchase price over the fair value of
net assets acquired, client lists and non-compete agreements was allocated to
goodwill. Acquisitions, including contingent consideration earned,
F-29
51
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limits the payment of dividends by a companyresulted in increases to its parent. The
maximum dividend that may be paid without prior approval of the Director of
Insurance is limited to the greater of the statutory net income of the preceding
calendar 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 prepared in
accordance with generally accepted accounting principles ("GAAP"). The Company's
insurance subsidiaries file annual financial statements with the Ohio Department
of Insurance and Utah Department of Insurance and are prepared on the basis of
accounting practices prescribed by such regulatory authorities, which differ
from GAAP. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
prescribed. All material transactions recorded by the Company's insurance
subsidiaries are in accordance with prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital ("RBC") formula. This model act requires every property and casualty
insurer to calculate its total adjusted capital and RBC requirement, and
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 subsidiaries of the Company are
domiciled. The RBC formula includes components for asset risk, liability risk,
interest rate exposuregoodwill, client lists and other factors. The Company's insurance subsidiaries
exceeded all required RBC levels as of December 31, 1997 and 1996.
CSC's statutory net income forintangible assets
during the years ended December 31, 1997, 19962004, 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 is2003 as follows (in thousands):
1997 1996 1995
------2004 2003
------ ------
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
===== ===== =====Goodwill.................................................... $2,619 $2,952
====== ======
Client lists................................................ $5,111 $4,516
====== ======
Other intangible assets..................................... $ 307 $ 201
====== ======
F-2217. DIVESTITURES
During 2004, CBIZ sold or closed five business operations, consisting of
four ATA operations, and an operation from our National Practices -- Other
segment. In addition to the divestiture of these operations, CBIZ sold three
client lists from our ATA practice group and a client list from our B&I practice
group. Sales were made for aggregate proceeds of $4.6 million cash, $2.3 million
in notes receivable and CBIZ stock valued at $0.1 million. Three of the
divestitures qualified for treatment as discontinued businesses and are
classified as such in the accompanying consolidated financial statements
(further discussed in Note 20). Operations that did not qualify for treatment as
discontinued businesses were sold for a pre-tax gain of $1.0 million, that is
reported as gain on sale of operations, net from continuing operations.
During 2003, CBIZ sold or closed eight business operations consisting of
four ATA operations, two Benefit and Insurance operations and two National
Practice operations. CBIZ also sold four client lists and related assets within
the ATA practice group. These businesses and client lists were sold for
aggregate proceeds of $7.2 million cash, $0.2 million in stock, $0.4 million in
notes receivable, and $0.1 million in other receivables. Six of the business
operations satisfied the criteria for treatment as discontinued businesses, and
were classified as such in the accompanying financial statements. The two
operations and client lists which did not qualify for treatment as discontinued
businesses were sold for a pretax gain of $2.5 million, which is reported as
gain on sale of operations, net from continuing operations.
During 2002, CBIZ sold, closed, or committed to sale the divestiture of
sixteen businesses. The businesses were sold for aggregate proceeds of $7.8
million cash, and $4.2 million of notes receivable. Five of the operations have
been classified as discontinued businesses. The remaining eleven operations were
either initiated before CBIZ's adoption of SFAS No. 144 "Accounting for the
Impairment of or the Disposal of Long-Lived Assets", or did not meet the
criteria for treatment as a discontinued business. These businesses were sold
for a pre-tax gain of $0.9 million which is reported as gain on sale of
operations, net from continuing operations. Of these eleven operations, CBIZ
completed the sale or closing of eight ATA operations, one Benefit and Insurance
operation, and two National Practice operations.
CBIZ may earn additional proceeds on the sale of certain client lists,
which are contingent upon future revenue generated by the client lists. CBIZ
records these proceeds as other income when they are earned.
F-30
52
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal statutory
income tax rate to income from continuing operations before income taxes, as
follows (in thousands):
1997 1996 1995
------ ------ ------
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 from continuing
operations....................................... $6,280 $1,640 $1,422
====== ====== ======
Effective income tax rate.......................... 33.0% 27.1% 29.1%
====== ====== ======
The tax effects of temporary differences that give rise to significant
portionsfollowing is a summary of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996, are as follows (in thousands):
1997 1996
------- -------
Deferred tax assets:
Loss expenses payable discounting............................. $ 2,852 $ 2,176
Net operating loss carryforwards.............................. 2,696 1,136
Unearned premiums not deductible.............................. 1,122 1,105
Deferred compensation......................................... 632 --
Allowance for doubtful accounts............................... 388 --
Other deferred tax assets..................................... 97 151
------ ------
Total gross deferred tax assets............................ 7,787 4,568
Less: valuation allowance.................................. (2,135) (1,379)
------ ------
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................... $ 331 $ 327
====== ======
Net deferred tax liability attributable to discontinuedunaudited quarterly results of operations included in net assets held for disposal....... $ -- $ 1,340
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-23
53
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
separate company profitability of certain acquired entities. The Company has
established valuation allowances for portions of acquired NOL carryforwards and
other deferred tax assets. The net change in the valuation allowance
for the years ended December 31, 19972004 and 1996 was a increase of $756,000 and decrease
of $589,000, respectively. 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 $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 following2003 (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-24
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 of its premises and equipment under various
operating lease agreements. At December 31, 1997, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
YEARS ENDING
DECEMBER 31,
- -----------------------------------------------------------
1998................................................ $ 6,800
1999................................................ 6,007
2000................................................ 5,052
2001................................................ 3,955
2002................................................ 3,260
Thereafter.......................................... 10,689
-------
$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........................................... $ 348 $ 60 $ 216
====== ====== ======
Income Taxes....................................... $5,753 $1,290 $ 128
====== ====== ======
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-25
55
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's investment portfolios include loans to business organizations
associated with a relative 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's are partners (among others)
in SMR & Co. CPA, which buys services from a subsidiary of the Company.
Collectively, these two officers hold a 9% interest 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-26
56
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly financial data are summarized as follows (amounts in thousands, except per share
amounts):
19972004
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- ---------------------------------------------
--------- -------- ------------- ------------
Revenues..................................... $16,296 $ 21,088 $27,474 $ 43,372
======= ======= ======= =======Revenue......................... $146,514 $126,451 $121,550 $125,542
Operating expenses.............. 118,058 112,682 109,877 118,740
-------- -------- -------- --------
Gross margin.................... 28,456 13,769 11,673 6,802
Corporate general and
administrative................ 5,379 6,055 6,841 6,498
Depreciation and amortization... 3,972 4,139 4,105 4,212
-------- -------- -------- --------
Operating income................ 19,105 3,575 727 (3,908)
Other income (expense):
Interest expense.............. (240) (429) (369) (469)
Gain on sale of operations,
net........................ 384 534 78 --
Other income (expense), net... 536 295 527 2,196
-------- -------- -------- --------
Total other income
(expense), net........... 680 400 236 1,727
Income from continuing
operations............ $ 2,109 $ 2,233 $ 3,415 $ 5,008operations before income tax
expense....................... 19,785 3,975 963 (2,181)
Income tax expense (benefit).... 8,269 1,311 473 (4,362)
-------- -------- -------- --------
Income from continuing
operations.................... 11,516 2,664 490 2,181
Loss from operations of
discontinued businesses, net
of tax........................ 65 (282) (372) (343)
Gain (loss) fromon disposal of
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)businesses, net
of tax........................ -- -- (0.02)
------- ------- ------- -------238 (106)
-------- -------- -------- --------
Net income (loss)............... $ 11,581 $ 2,382 $ 356 $ 1,732
======== ======== ======== ========
Earnings (loss) per share.......................share:
Basic:
Continuing operations......... $ 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.......................0.14 $ 0.03 $ 0.040.01 $ 0.070.03
Discontinued operations....... -- -- -- (0.01)
-------- -------- -------- --------
Net income.................... $ 0.09
======= ======= ======= =======
Weighted0.14 $ 0.03 $ 0.01 $ 0.02
======== ======== ======== ========
Diluted:
Continuing operations......... $ 0.13 $ 0.03 $ 0.01 $ 0.03
Discontinued operations....... -- -- -- (0.01)
-------- -------- -------- --------
Net income.................... $ 0.13 $ 0.03 $ 0.01 $ 0.02
======== ======== ======== ========
Basic weighted average common
shares............... 34,507 35,817 37,927 39,293
======= ======= ======= =======
Weightedshares........................ 85,437 77,885 77,311 76,287
======== ======== ======== ========
Diluted weighted average common
shares and diluted
potential common shares:................... 48,059 47,042 48,992 50,494
======= ======= ======= =======shares........................ 87,912 80,150 79,373 78,449
======== ======== ======== ========
F-31
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the fourth quarter of 2004, CBIZ recorded a $3.5 million tax benefit
related to a favorable tax position which was successfully resolved upon
completion of the Internal Revenue Service examination for the years ended
December 31, 1998, 1999 and 2000. In addition, CBIZ recorded $0.4 million in
interest income related to the refund, which is recorded as other income
(expense), net in the accompanying consolidated statements of operations. See
further discussion of the tax benefit and refund in Note 6.
19962003
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- ---------------------------------------------
--------- -------- ------------- ------------
Revenues..................................... $ 9,320 $ 7,346 $ 9,389 $ 9,714
======= ======= ======= =======Revenue......................... $143,208 $123,289 $117,396 $122,889
Operating expenses.............. 115,140 109,500 107,394 109,618
-------- -------- -------- --------
Gross margin.................... 28,068 13,789 10,002 13,271
Corporate general and
administrative................ 4,781 4,912 4,940 4,885
Depreciation and amortization... 4,249 4,309 4,095 4,436
-------- -------- -------- --------
Operating income................ 19,038 4,568 967 3,950
Other income (expense):
Interest expense.............. (323) (297) (234) (201)
Gain on sale of operations,
net........................ -- 1,784 207 528
Other income (expense), net... (1,006) (4) 452 (651)
-------- -------- -------- --------
Total other income
(expense), net........... (1,329) 1,483 425 (324)
Income from continuing
operations............ $ 655 $ 771 $ 839 $ 2,157operations before income tax
expense....................... 17,709 6,051 1,392 3,626
Income tax expense.............. 7,532 2,555 1,068 1,340
-------- -------- -------- --------
Income from continuing
operations.................... 10,177 3,496 324 2,286
Loss from operations of
discontinued operations............businesses, net
of tax........................ (176) (66) (352) (1,099)
Gain (loss) on disposal of
discontinued businesses, net
of tax........................ -- (183) (210) 1,119
-------- -------- -------- --------
Net income (loss)............... $ 10,001 $ 3,247 $ (238) $ 2,306
======== ======== ======== ========
Earnings (loss) per share:
Basic:
Continuing operations......... $ 0.11 $ 0.04 $ -- $ 0.03
Discontinued operations....... -- (0.01) -- --
-------- -------- -------- --------
Net income.................... $ 0.11 $ 0.03 $ -- (38)$ 0.03
======== ======== ======== ========
Diluted:
Continuing operations......... $ 0.11 $ 0.04 $ -- $ 0.03
Discontinued operations....... -- (0.01) -- --
-------- -------- -------- --------
Net income.................... $ 0.11 $ 0.03 $ -- $ 0.03
======== ======== ======== ========
Basic weighted average common
shares........................ 95,087 95,138 86,228 85,302
======== ======== ======== ========
Diluted weighted average common
shares........................ 96,956 97,178 88,971 89,073
======== ======== ======== ========
F-32
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the fourth quarter of 2003, CBIZ recorded impairment charges of $0.8
million related to the impairment of a note taken in connection with the
divestiture of the hazardous waste operation in 1997 that filed for bankruptcy
in 2003. The impairment charges are recorded as other income (expense), net in
the accompanying consolidated statements of operations.
19. SEGMENT DISCLOSURES
CBIZ's business units have been aggregated into three practice groups:
Accounting, Tax and Advisory Services, Benefits and Insurance and National
Practices. The business units have been aggregated based on the following
factors: similarity of the products and services; similarity of the regulatory
environment; the long-term performance of these units is affected by similar
economic conditions; and the business is managed along these segment lines,
which each report to a Practice Group Leader. The medical practice management
unit, which reports under the National Practices group, exceeds the quantitative
threshold of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," for aggregation and therefore is reported as a separate
segment.
Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory
Services practice group offers services in the following areas: cash flow
management; strategic planning; consulting; record-keeping; federal, state and
local tax return preparation; tax planning based on financial and investment
alternatives; tax structuring of business transactions such as mergers and
acquisitions; quarterly and year-end payroll tax reporting; corporate,
partnership and fiduciary tax planning and return preparation; outsourced chief
financial officer services and other financial staffing services; financial
investment analysis; succession, retirement, and estate planning; profitability,
operational and efficiency enhancement consulting to a number of specialized
industries; litigation support services; internal audit services and
Sarbanes-Oxley consulting and compliance services.
Benefits and Insurance Services. The Benefits and Insurance practice group
offers services in the following areas: employee benefits, brokerage,
consulting, and administration, including the design, implementation and
administration of qualified plans, such as 401(k) plans, profit-sharing plans,
defined benefit plans, and money purchase plans; actuarial services; health and
welfare benefits consulting, including group health insurance plans; dental and
vision care programs; group life insurance programs; accidental death and
dismemberment and disability programs; COBRA administration and voluntary
insurance programs; health care and dependent care spending accounts; premium
reimbursement plans; communications services to inform and educate employees
about their benefit programs; executive benefits consulting on non-qualified
retirement plans and business continuation plans; specialty high-risk life
insurance; employee benefit worksite marketing; and wealth management services,
including Registered Investment Advisory Services, Investment Policy Statements,
also known as IPS, mutual fund selection based on IPS and ongoing mutual fund
monitoring.
National Practices. The National Practices group offers services in the
following areas: payroll processing and administration; valuations of
commercial, tangible, and intangible assets and financial securities; mergers
and acquisitions and capital advisory services, health care consulting,
government relations; process improvement; and technology consulting, including
strategic technology planning, project management, development, network design
and implementation and software selection and implementation.
Medical Practice Management. The CBIZ MMP subsidiary of the National
Practice group offers services in the following areas: billing and accounts
receivable management; coding and automated claims filing; comprehensive
delinquent claims follow up and collections; compliance plans to meet government
and other third party regulations; local office management; and comprehensive
statistical and operational reporting; financial reporting, accounts payable,
payroll, general ledger processing; design and implementation of managed care
contracts with focus on negotiation strategies, pricing, cost containment and
utilization tracking; review and negotiation of hospital contracts; evaluation
of other strategic business partners; identification and coordination of
practice manager and integration opportunities; and coordination of practice
expansion efforts.
F-33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in corporate and other, are operating expenses that are not
directly allocated to the business units. These expenses are primarily comprised
of incentive compensation, and consolidation and integration charges.
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, 2004, 2003, and 2002
was as follows (in thousands):
2004
--------------------------------------------------------------------
NATIONAL PRACTICES
------------------
ACCOUNTING, MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
----------- ---------- -------- ------- --------- --------
Revenue..................... $209,077 $152,240 $87,261 $71,479 $ -- $520,057
Operating expenses.......... 180,282 128,691 71,885 65,293 13,206 459,357
-------- -------- ------- ------- ------- -------
Net income................................. $ 655 $ 771 $ 839 $ 2,119
======= ======= ======= =======
Earnings per common share:
Basic --
Continuing operations................... $ .04 $ .05 $ .06 $ .09
Discontinued operations.................-------- --------
Gross margin................ 28,795 23,549 15,376 6,186 (13,206) 60,700
Corporate general and
admin..................... -- -- -- -- 24,773 24,773
Depreciation and
amortization.............. 3,683 3,079 2,719 884 6,063 16,428
-------- -------- ------- ------- ------- -------
Net-------- --------
Operating income per share....................... $ .04 $ .05 $ .06 $ .09
======= ======= ======= =======
Earnings per common share:
Diluted --
Continuing operations................... $ .04 $ .05 $ .03 $ .06
Discontinued operations.................(loss)..... 25,112 20,470 12,657 5,302 (44,042) 19,499
Other income (expense):
Interest expense.......... (43) 57 (1) 20 (1,540) (1,507)
Gain on sale of
operations, net......... -- -- -- -- 996 996
Other income, net......... 363 789 25 439 1,938 3,554
-------- -------- ------- ------- -------- --------
Total other income...... 320 846 24 459 1,394 3,043
-------- -------- ------- ------- -------- --------
Income (loss) from
continuing operations
before income tax
expense................... $ 25,432 $ 21,316 $12,681 $ 5,761 $(42,648) $ 22,542
======== ======== ======= ======= ======== ========
F-34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2003
---------------------------------------------------------------------
NATIONAL PRACTICES
-------------------
ACCOUNTING, MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
----------- ---------- -------- -------- --------- --------
Revenue....................... $199,612 $162,095 $75,785 $69,290 $ -- $506,782
Operating expenses............ 174,452 128,407 61,566 69,516 7,711 441,652
-------- -------- ------- ------- -------- --------
Gross margin.................. 25,160 33,688 14,219 (226) (7,711) 65,130
Corporate general and admin... -- -- -- -- 19,518 19,518
Depreciation and
amortization................ 4,269 3,005 2,595 1,116 6,104 17,089
-------- -------- ------- ------- -------- --------
Operating income (loss)....... 20,891 30,683 11,624 (1,342) (33,333) 28,523
Other income (expense):
Interest expense............ (49) (63) (5) (1) (937) (1,055)
Gain on sale of operations,
net....................... -- -- -- -- 2,519 2,519
Other income (expense),
net....................... 652 53 (17) 203 (2,100) (1,209)
-------- -------- ------- ------- -------- --------
Total other income
(expense).............. 603 (10) (22) 202 (518) 255
-------- -------- ------- ------- -------- --------
Income (loss) from continuing
operations before income tax
expense..................... $ 21,494 $ 30,673 $11,602 $(1,140) $(33,851) $ 28,778
======== ======== ======= ======= ======== ========
2002
---------------------------------------------------------------------
NATIONAL PRACTICES
-------------------
ACCOUNTING, MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
----------- ---------- -------- -------- --------- --------
Revenue....................... $202,736 $150,514 $66,156 $73,549 $ -- $492,955
Operating expenses............ 174,901 123,369 54,481 72,302 9,336 434,389
-------- -------- ------- ------- -------- --------
Gross margin.................. 27,835 27,145 11,675 1,247 (9,336) 58,566
Corporate general and admin... -- -- -- -- 19,177 19,177
Depreciation and
amortization................ 5,115 3,592 1,972 1,572 8,110 20,361
-------- -------- ------- ------- -------- --------
Operating income (loss)....... 22,720 23,553 9,703 (325) (36,623) 19,028
Other income (expense):
Interest expense............ (55) (76) (7) (51) (2,288) (2,477)
Gain on sale of operations,
net....................... -- -- -- -- 930 930
Other income (expense),
net....................... 581 392 (12) (1,601) (927) (1,567)
-------- -------- ------- ------- -------- --------
Total other income
(expense).............. 526 316 (19) (1,652) (2,285) (3,114)
-------- -------- ------- ------- -------- --------
Income (loss) from continuing
operations before income tax
expense..................... $ 23,246 $ 23,869 $ 9,684 $(1,977) $(38,908) $ 15,914
======== ======== ======= ======= ======== ========
20. DISCONTINUED BUSINESSES
From time to time, CBIZ will divest (through sale or closure) business
operations that are underperforming, located in secondary markets, or do not
provide the level of synergistic cross-serving opportunities with other CBIZ
businesses that is desired. During the years ended December 31, 2004, 2003 and
2002, CBIZ divested of
F-35
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
three, six and five business operations respectively. One business unit remained
available for sale at December 31, 2002, which was sold in 2003. There were no
businesses available for sale at December 31, 2004 or 2003.
These business operations are reported as discontinued businesses and the
net assets, liabilities and results of operations are reported separately in the
accompanying consolidated financial statements. Revenue and loss from operations
of discontinued businesses for the years ended December 31 2004, 2003 and 2002
were as follows (in thousands):
2004 2003 2002
------- ------- -------
-------
Net income per share.......................
Revenue.................................................. $ .04 $ .05 $ .03 $ .063,372 $12,506 $18,622
======= ======= =======
=======
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
=======Loss from operations of discontinued businesses, before
income tax expense (benefit)........................... $(1,351) $(2,601) $(1,792)
Income tax expense (benefit)............................. (419) (908) 338
------- ------- -------
Loss from operations of discontinued businesses, net of
tax.................................................... $ (932) $(1,693) $(2,130)
======= ======= =======
F-27Gain (loss) on disposal of discontinued businesses for the years ended
December 31 2004, 2003 and 2002 were as follows (in thousands):
2004 2003 2002
---- ------ -------
Gain (loss) on disposal of discontinued businesses, before
income tax expense (benefit).............................. $398 $1,457 $(3,884)
Income tax expense (benefit)................................ 266 731 (1,413)
---- ------ -------
Gain (loss) on disposal of discontinued businesses, net of
tax....................................................... $132 $ 726 $(2,471)
==== ====== =======
At December 31, 2004 and 2003, the assets and liabilities of business
operations classified as discontinued businesses consisted of the following (in
thousands):
2004 2003
---- ------
ASSETS:
Accounts receivable, net.................................... $ 85 $2,272
Property and equipment, net................................. 122 444
Deferred income taxes, net.................................. 208 312
Other assets................................................ 2 151
---- ------
Assets of businesses held for sale........................ $417 $3,179
==== ======
LIABILITIES:
Accounts payable............................................ $133 $ 254
Other liabilities........................................... 32 572
---- ------
Liabilities of businesses held for sale................... $165 $ 826
==== ======
21. SUBSEQUENT EVENTS (UNAUDITED)
On February 10, 2005, the Board of Directors authorized the repurchase of
up to 5.0 million shares of CBIZ common stock. The common stock may be
repurchased in open market or privately negotiated purchases.
In January 2005, CBIZ completed the acquisitions of two companies. Gallery
Asset Management, Inc. is an Ohio-based registered investment advisor, which
will compliment our wealth management business. Nation Smith Hermes Diamond is
an accounting, tax and advisory firm located in San Diego, California.
F-36
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, 19962004, 2003, AND 19952002
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
COLUMN F
- --------------------------------- -------- ------------------------------------------- ------------ ------------------------------------ ------------ ----------
ADDITIONS
------------------------------------
BALANCE AT CHARGED TO CHARGED ACQUISITIONS CHARGE-OFFS, BALANCE AT
BEGINNING OF COST AND TO OTHER AND NET OF END OF
PERIOD EXPENSE ACCOUNTS DIVESTITURES RECOVERIES 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 31, 1997.............. $ 4,478 $50,655 $ 22,656 N/A $37,238
December 31, 1996.............. 4,345 41,009 18,637 N/A 27,651
December 31, 1995.............. 3,428 37,002 15,636 N/A 26,962
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-29
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 $18,4942004
Allowance deducted from assets
to which they apply:
Allowance for doubtful
accounts................. $6,303 $4,639 $375 $ 7,647 $37,238 20.54%55 $(5,226) $6,146
====== ====== ==== ===== ======= ======
Year ended December 31, 1996
Property -- Casualty Earned
Premiums........................... $39,311 $12,2362003
Allowance deducted from assets
to which they apply:
Allowance for doubtful
accounts................. $6,568 $5,255 $ 576 $27,651 2.08%79 $(166) $(5,433) $6,303
====== ====== ==== ===== ======= ======
Year ended December 31, 1995
Property -- Casualty Earned
Premiums........................... $36,005 $10,5502002
Allowance deducted from assets
to which they apply:
Allowance for doubtful
accounts................. $9,540 $7,119 $ 1,507 $26,962 5.59%11 $(167) $(9,935) $6,568
====== ====== ==== ===== ======= ======
See accompanying Independent Auditors' Report.
F-30F-37