ITEM 3. LEGAL PROCEEDINGS
Since September 1999, seven purported stockholder class-action lawsuits were filed as follows: (i) Jim A. Darby, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda, Edward F. Feighan and Douglas R. Gowland, Case No. 1:99CV2200; (ii) Joy Iannotta v. Century Business Services, Inc., Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda, Edward F. Feighan and Douglas R. Gowland, Case No. 1:99CV2337; (iii) Robert M. DeBolt, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc. Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda, Edward J. Feighan and Douglas R. Gowland, Case No. 1:99CV2467 (subsequently consolidated into a single case, Jim A. Darby, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda and Edward F Feighan, Case No. 1:99CV2200); (iv) David Gochman, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote and Fred M. Winkler, Case No. 1:00CB0386; (v) Scott Korn, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc. Michael G. DeGroote and Fred M. Winkler, Case No. 1:00CV0440 and; (vi) Joe Marsh, Lee Marshall, Flats Entertainment, Inc., Bruce Kapp and Dave Kajganich, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote, Fred M. Winkler, Charles D. Hamm, Jr., Jerry Grisko and Keith W. Reeves, Case No. 1:00CV0584, each filed in the United States District Court for the Northern District of Ohio against CBIZ and certain of its current and former directors and officers; and (vii) Talbot Jones Albert, IV, on Behalf of Himself and All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote and Fred M. Winkler, Case No. JFM00CV565, filed in the United States
District Court for the District of Maryland against CBIZ and certain of its current and former directors and officers. The plaintiffs in each of these cases alleged that the named defendants violated certain provisions of the Securities Exchange Act of 1934 and certain rules promulgated thereunder in connection with certain statements made during various periods from February 1998 through January 2000 by, among other things, improperly amortizing goodwill and failing adequately to monitor changes in operating results. The complaints seek damages in unspecified amounts.
CBIZ and the named officer and director defendants moved the United States District Court in the Northern District of Ohio to consolidate the six Ohio cases into a single action and appoint a single lead plaintiff and counsel and require the filing of a consolidated amended complaint. The United States District Court agreed, and is in the process of consolidating the cases and receiving motions from the various plaintiffs regarding who will serve as lead plaintiff and lead counsel.
CBIZ and the named officer and director defendants filed an agreed motion with the plaintiffs in the Maryland action to transfer that case from the District of Maryland to the Northern District of Ohio. CBIZ and the named officer and director defendants also filed a motion with the Northern District of Ohio to assign the case to District Judge Matia and consolidate it with the already-consolidated Ohio cases. Each of these motions has been granted, and the Maryland case has been consolidated into the other class action cases before District Judge Matia.
There has been no discovery in any of these actions.
CBIZ and the named officer and director defendants deny all allegations of wrongdoing made against them in these actions and intend to vigorously defend each of these lawsuits. Although the ultimate outcome of such litigation is uncertain, based on the allegations contained in the complaints, management does not believe that these lawsuits will have a material adverse effect on the financial condition, results of operations or cash flows of CBIZ.
On or about May 6, 2000, certain former shareholders of a company acquired by Century filed suit -- Hanan et al. v. Century Business Services, Inc. and Gregory J. Skoda, Case No. 407495 (Ohio Ct. Common Pleas) -- alleging that the Company fraudulently induced them to enter into merging with the company and breached the Agreement and Plan of Merger and Executive Employment Agreements plaintiffs entered into in connection with the merger. On July 31, 2000 the Company moved to dismiss the Complaint. On October 10, 2000, the Court denied Century's motion to dismiss, and on December 12, 2000, Century filed its answer and counterclaim against the plaintiffs. Discovery in this action has commenced, and a trial on the employment agreements is scheduled to commence on May 21, 2001. No trial date has been set on the remaining issues in this case. Plaintiffs have not specified the amount of damages they seek to recover.
CBIZ and the named former officer defendant deny all allegations of wrongdoing made against them in these actions and intend to vigorously defend this lawsuit. Although the ultimate outcome of such litigation is uncertain, based on the allegations contained in the complaints, management does not believe that these lawsuits will have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
On February 25, 2000, CBIZ filed suit in the Missouri Circuit Court of the County of St. Louis against all of the former shareholders of a company it acquired in 1999, alleging breach of contract and fraud in connection with Agreement and Plan of Merger. On March 31, 2000, two of the defendants filed a counterclaim against CBIZ, alleging breach of contract, fraud, and violations of Section 12(2) of the Securities Act. On May 10, 2000, the same shareholders who filed the counterclaim against CBIZ in the Missouri State Court filed suit against CBIZ and 10 of its current and former officers and directors -- Fuchs et al. v. Century Business Services, Inc., Michael G. DeGroote, Charles D. Hamm, Jr., Fred M. Winkler, Daniel J. Clark, Jerome P. Grisko, Jr., Rick L. Burdick, Joseph S. DiMartino, Harve A. Ferrill, Hugh P. Lowenstein, and Richard C. Rochon, Case No. 1:00 CV 1193 (N.D. Oh.) -- alleging the same wrongdoing and that the named defendants violated Sections 10(b) and 20(a) of the Exchange Act and 12(2) and 15(a) of the Securities Act by making materially false statements contained in the SEC documents provided to the plaintiffs in connection with the Agreement and Plan of Merger as well as misrepresentation claims under the common law.
On July 31, 2000, CBIZ moved to dismiss the federal action. While the motion was pending, the parties recently settled all of the litigation between them on confidential terms that management believes were favorable to the Company.
On April 11, 2000, CBIZ and a wholly-owned subsidiary initiated a lawsuit in Toronto, Canada against former owners of a business acquired by CBIZ, claiming (1) that the former owner breached representations and warranties in the purchase agreement and (2) that a company owned by one of the shareholders owed CBIZ payment for services rendered. CBIZ E-Solutions, Inc. and Century Business Solutions, Inc. V. Paven R. Bratch, Review Worldwide Ltd., 1069904 Ontario Limited and Royal Bank of Canada Financial Corp. in its capacity and acting on behalf of the Bratch International Trust, Ontario Superior Ct. No. 00-CV-188556. In addition, CBIZ asked the Ontario Court to declare that CBIZ justifiably terminated the employment contract of one of the former shareholders. On August 1, 2000 the former shareholders and the company owned by a former shareholder filed counterclaims against CBIZ in the Ontario action, seeking damages from CBIZ for breach of contract, wrongful termination of employment, and defamation. The parties recently settled all of the litigation between them on confidential terms that management believes were favorable to the Company.
In addition to the above-disclosed items, CBIZ is from time to time subject to claims and suits arising in the ordinary course of business. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
ITEM 4.
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.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The common stock of CBIZ is quoted on the Nasdaq National Market under the trading symbol "CBIZ". The table below sets forth the range of high and low sales prices for the Common Stock as reported on the Nasdaq National Market for the periods indicated.
On December 29, 2000, the last reported sale price of CBIZ's Common Stock as reported on the Nasdaq National Market (Nasdaq Amex-Online) was $1.13 per share. As of March 23, 2001, CBIZ had 1,716 holders of its common stock.
DIVIDEND POLICY
CBIZ has not paid cash dividends on its common stock since April 27, 1995, and does not anticipate paying cash dividends in the foreseeable future. CBIZ's board of directors decides on the payment and level of dividends on common stock. The board of director's decision is based among other things on results of operations and financial condition. In addition, CBIZ's credit facility contains a requirement for lender consent prior to the declaration of any dividends. CBIZ currently intends to retain future earnings to finance the ongoing operations and growth of the business. Any future determination as to dividend policy will be made at the discretion of the board of directors and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects, limitations on dividend payments pursuant to credit or other agreements and such other factors as the board of directors may deem relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for CBIZ and is derived from the historical consolidated financial statements and notes thereto, which are included elsewhere in this Annual Report of CBIZ. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of CBIZ and the notes thereto, which are included elsewhere in this Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of CBIZ's financial position and results of operations for each of the years ended December 31, 2000, 1999 and 1998. This discussion should be read in conjunction with CBIZ's consolidated financial statements and notes thereto included herein. During 2000, CBIZ significantly slowed its strategic acquisition program, purchasing the businesses of two complementary companies. These acquisitions were accounted for under the purchase method of accounting, and accordingly, the operating results of the acquired companies have been included in CBIZ's consolidated financial statements since their date of acquisition.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
Revenues
Total revenue for the year ended December 31, 2000 was $567.8 million under the new revenue recognition policy adopted under Staff Accounting Bulletin No. 101 (SAB 101) as compared to $546.4 million under CBIZ's historical accounting policy (pre-SAB 101), representing an increase of $21.4 million, or 3.9%. Had CBIZ reported 2000 revenue in accordance with its pre-SAB 101 policy, revenue would have been approximately $585.9 million, representing an increase over the prior year of $39.5 million, or 7.2%. The increase in revenue was primarily attributable to (i) CBIZ's acquisitions completed in 2000 and 1999 that were accounted for under the purchase method of accounting, and (ii) internal growth. Acquisitions completed in 2000 and 1999 under the purchase accounting method, which are included from the date of acquisition, accounted for $33.9 million of such increase, on a pre-SAB 101 basis. Internal growth is based on the increase in revenues of companies that have a full period of operations for the year ended December 31, 1999, including companies that are accounted for as pooling-of-interests, as compared to the comparable period for 1999.
Expenses
Total expenses (including other expense) increased to $678.5 million (post-SAB 101) for the year ended December 31, 2000, from $520.5 million (pre-SAB 101) for the comparable period in 1999, representing an increase of $158.0 million, or 30.3%. Had CBIZ reported 2000 total expenses in accordance with its pre-SAB 101 policy, operating expenses would have been approximately $689.9 million, representing an increase over the prior year of $169.4 million, or 32.5%. Such increase, on a pre-SAB 101 basis, was primarily attributable to (i) an increase in operating expenses, (ii) the impact of CBIZ's acquisitions made in 2000 and 1999, (iii) goodwill impairment and other asset write-downs, (iv) losses on businesses sold or to be divested of, and (v) $10.5 million of additional amortization expense for the change in the goodwill amortization period from 40 to 15 years beginning October 1, 1999.
Operating expenses increased to $510.0 million (post-SAB 101) for the year ended December 31, 2000, from $454.1 million (pre-SAB 101) for the comparable period in 1999, representing an increase of $55.9 million, or 12.3%. Had CBIZ reported 2000 operating expenses in accordance with its pre-SAB 101 policy, operating expenses would have been approximately $521.4 million, representing an increase of $67.3 million, or 14.8%. Such increase, on a pre-SAB 101 basis, was primarily attributable to acquisitions completed in 2000 and 1999, and an increase in bad debt expense over prior year levels of $16.9 million. Included in operating expenses in 2000 was $1.0 million of consolidation and integration charges (net of $5.9 million reversal of lease accrual), compared to $13.9 million of consolidation and integration charges in 1999. As a percentage of total revenues, operating expenses increased to 89.8% for the year ended December 31, 2000, from 83.1% for the comparable period in 1999.
Corporate general and administrative expenses increased to $24.7 million for the year ended December 31, 2000, from $19.1 million for the comparable period in 1999, representing an increase of $5.6 million, or 29.0%. Such increase was attributable to growth of the corporate office needed to support CBIZ's infrastructure (including the Shared Services Center), corporate initiatives, and legal expenses. Included in corporate general and administrative expenses in 2000 was $1.6 million of consolidation and integration charges (net of $2.4 million reversal of severance accrual), compared to $6.4 million of consolidation and integration charges in
1999. Corporate general and administrative expenses represented 4.3% of total revenues for the year ended December 31, 2000, compared to 3.5% for the comparable period in 1999.
Depreciation and amortization expense increased to $44.3 million for the year ended December 31, 2000, from $23.5 million for the comparable period in 1999, representing an increase of $20.8 million, or 88.9%. The increase in depreciation and amortization expense in 2000 is a result of a) goodwill associated with acquisitions completed in 1999 and 2000, b) the change in the goodwill amortization period from 40 years to 15 years beginning October 1, 1999, and c) increased depreciation expense related to the Oracle application placed in service on January 1, 2000, and other capital expenditures. The change in the goodwill amortization period resulted in an additional $10.5 million of goodwill amortization expense for 2000 as compared to 1999. As a percentage of total revenues, depreciation and amortization expense increased to 7.8% for the year ended December 31, 2000 from 4.3% for the comparable period in 1999.
CBIZ incurred merger-related expenses of $5.8 million for the year ended December 31, 1999. Merger-related expenses are comprised primarily of professional fees incurred in transactions accounted for as pooling- of-interests and the salaries of employees dedicated to merger activities. There were no merger-related expenses in 2000 as a result of the significant reduction in CBIZ's acquisition program, and there were no transactions accounted for as pooling-of-interests in such period.
Interest expense was $12.1 million for the year ended December 31, 2000, as compared to $6.6 million for the same period in 1999. During 2000, CBIZ began the year with a credit facility balance of $144.0 million and ended the year with a balance of $117.5 million, a decrease of $26.5 million. Notwithstanding, the average debt carried during 2000 was $144.6 million versus $95.2 million in 1999. In addition, the average effective interest rate was 8.7% in 2000 versus 6.1% in 1999. Both factors contributed to interest expense increasing $5.5 million, year over year.
A goodwill impairment charge of $48.2 million was recorded for the year ended December 31, 2000. The necessity for this charge was based upon management's continual evaluation of the recoverability of goodwill and other long-lived assets. During the fourth quarter, management concluded that goodwill associated with eleven business units was no longer recoverable through future operations based upon a recent deterioration in current and projected operating performance at such units and an impairment charge of approximately $48.2 million was required in the fourth quarter to write-down such goodwill to estimated fair value.
CBIZ recorded a loss on sale of operations of $31.6 million for the year ended December 31, 2000, as compared to $7.1 million for the year ended December 31, 1999. Such charges in 2000 are the result of a) the divestiture of three business units previously announced in December 1999, b) the sale of CBIZ's franchise operations announced on November 2, 2000 at a loss of $3.8 million, and c) the loss related to the planned divestiture of two additional business units to be completed in 2001 of $27.2 million.
Other expense, net was $7.5 million for the year ended December 31, 2000, as compared to $4.4 million for the comparable period in 1999, representing a change of approximately $3.1 million, or 70.8%. In 2000, other expense was comprised primarily of a) $1.6 million impairment of a note received in connection with the sale of certain environmental properties in 1997; b) $3.8 million related to the settlement and reserve of certain legal proceedings; c) $0.4 million related to the closing of operations in Toronto, Canada; and d) $2.7 million related to software and other asset impairment, offset by interest income. In 1999, other expense was comprised of an $8.9 million charge due to the impairment of notes received in connection with a transaction accounted for as a discontinued operation in 1997, offset by interest income and other income of $4.5 million.
CBIZ recorded an income tax benefit from continuing operations of $3.4 million for the year ended December 31, 2000, compared with income tax expense of $14.4 million ($16.2 million on a pro forma basis) for the comparable period in 1999. The effective income tax rate from continuing operations decreased to 3.1% from 55.8% (62.6% on a proforma basis) for the comparable period in 1999. Such decrease in the effective income tax rate was primarily attributable to the pretax loss from continuing operations, the goodwill impairment charge (which was primarily non-deductible), and the write-down of several non-core business units to net realizable value.
As previously noted, CBIZ implemented a change in certain accounting policies as a result of adopting SAB 101. The cumulative effect of this change as of the beginning of 2000 was $11.9 million, net of tax benefit. See notes 1 and 14 to CBIZ's consolidated financial statements included herewith.
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Revenues
Total revenues increased to $546.4 million for the year ended December 31, 1999, from $359.5 million for the comparable period in 1998, representing an increase of $186.9 million, or 52.0%. The $186.9 million increase was primarily attributable to (i) CBIZ's acquisitions completed in 1999 and 1998 that were accounted for under the purchase method of accounting, and (ii) internal growth. Acquisitions completed in 1999 under the purchase accounting method, which are included from the date of acquisition, accounted for $33.7 million of such increase. Internal growth is based on the increase in revenues of companies that have a full period of operations for the year ended December 31, 1999, including companies that are accounted for as pooling-of-interests, as compared to the comparable period for 1998.
Expenses
Total expenses, including other income (expenses), increased to $520.5 million for the year ended December 31, 1999, from $301.9 million for the comparable period in 1998, representing an increase of $218.6 million, or 72.4%. Such increase was primarily attributable to (i) the increase in operating expenses, (ii) the impact of CBIZ's acquisitions made in 1999 and 1998, (iii) $27.4 million of consolidation and integration charges resulting from CBIZ's recently announced consolidation initiatives in December 1999, (iv) $8.9 million reserve taken for impairment of a note receivable, and (v) $4.2 million of additional amortization expense for the change in the goodwill amortization period to 15 years beginning October 1, 1999. As a percentage of total revenues, total expenses increased to 95.3% for the year ended December 31, 1999, from 84.0% for the comparable period of 1998. Excluding the consolidation and integration charges, the reserve for the note receivable, and the effect of the change in goodwill amortization period, the percentage of total expenses to total revenue for the year ended December 31, 1999 was 87.8%.
CBIZ announced on December 28, 1999 that its Board of Directors had approved a plan to consolidate several of its operations in multi-office markets and integrate certain back-office functions into a shared-services center. The plan includes the consolidation of at least 60 office locations, the elimination of more than 200 positions (including Corporate), and the divestiture of four small, non-core businesses. Pursuant to the plan, CBIZ recorded a consolidation and integration charge of $27.4 million, of which $13.9 million is included in operating expense, $7.1 million is included in loss on sale of operations, and $6.4 million is included in corporate general and administrative expense in the consolidated statements of operations. (See Note 16 to the CBIZ's Consolidated Financial Statements.)
Operating expenses increased to $454.1 million for the year ended December 31, 1999, from $282.7 million for the comparable period in 1998, representing an increase of $171.4 million, or 60.6%. Such increase was primarily attributable to acquisitions completed in 1999 and 1998, and includes $13.9 million of consolidation and integration charges, as discussed above. As a percentage of total revenues, operating expenses increased to 83.1% for the year ended December 31, 1999, from 78.6% for the comparable period in 1998. Excluding the consolidation and integration charges, the percentage of operating expenses to total revenue for the year ended December 31, 1999 was 80.6%.
Corporate general and administrative expenses increased to $19.1 million for the year ended December 31, 1999, from $5.2 million for the comparable period in 1998, representing an increase of $13.9 million, or 271.3%. Such increase was attributable to growth of the corporate office needed to support CBIZ's infrastructure, corporate initiatives, and integration and consolidation costs, including $6.4 million of consolidation and integration charges as discussed above. Corporate general and administrative expenses represented 3.5% of total revenues for the year ended December 31, 1999, compared to 1.4% for the comparable period in 1998. Excluding the consolidation and integration charges in the fourth quarter, the percentage of corporate general and administrative expenses represented 2.3% of total revenue for the year ended December 31, 1999.
Merger-related expenses increased to $5.8 million for the year ended December 31, 1999, from $4.5 million for the comparable period in 1998, representing an increase of $1.3 million, or 27.7%. Such increase was attributable primarily to transaction costs related to acquisitions completed in 1999, and the build out of the mergers and acquisitions department throughout 1998, resulting in the full utilization of the department in 1999. Included in merger-related expenses are fees on two significant pooling transactions completed in the third quarter of 1999. The shareholders of one of the pooled transactions paid a $1.0 million investment-banking fee, which was reflected on CBIZ's statement of operations in the third quarter and for the year ended December 31, 1999. Merger-related expenses are comprised primarily of professional fees incurred in transactions accounted for as pooling-of-interests and the salaries of employees dedicated to merger activities. Merger-related expenses increased through the first three quarters of 1999, but decreased during the fourth quarter of 1999 due to CBIZ's decision to slow the acquisition program and scale down the mergers and acquisitions department.
Depreciation and amortization expense increased to $23.5 million for the year ended December 31, 1999, from $11.1 million for the comparable period in 1998, representing an increase of $12.4 million, or 111.9%. The increase is a result of the increase of goodwill amortization and depreciation expense resulting from the 30 acquisitions completed by CBIZ in 1999, and the 48 acquisitions completed in 1998, which were accounted for under the purchase method of accounting, as well as the change in the goodwill amortization period to 15 years beginning October 1, 1999. The change in the goodwill amortization resulted in approximately $4.2 million in additional goodwill amortization expense in the fourth quarter and for the year ended December 31. 1999. As a percentage of total revenues, depreciation and amortization expense increased to 4.3% for the year ended December 31, 1999 from 3.1% for the comparable period in 1998. Excluding the effect of the change in the goodwill amortization period, depreciation and amortization expense increased to 3.5% of total revenues for the year ended December 31, 1999.
Interest expense was $6.6 million for the year ended December 31, 1999, as compared to interest expense of $3.2 million for the comparable period in 1998. Such fluctuation was due primarily to higher debt carried in 1999 from CBIZ's revolving credit facility as well as debt acquired in connection with 1999 acquisitions.
Other expense, net was $4.4 million for the year ended December 31, 1999, as compared to other income, net of $3.4 million for the comparable period in 1998, representing a change of approximately $7.8 million, or 230.8%. In 1999, other expense was comprised of an $8.9 million charge incurred due to the impairment of notes received in connection with a transaction accounted for as a discontinued operation in 1997 offset by interest income and other income of $4.5 million. In 1998, other income, net was attributable to interest income of $3.4 million.
CBIZ recorded income taxes from continuing operations of $14.4 million ($16.2 million on a pro forma basis) for the year ended December 31, 1999 and $20.6 million ($22.4 million on a pro forma basis) for the comparable period in 1998. The effective income tax rate from continuing operations increased to 55.8% (62.6% on a pro forma basis) from 35.7% (38.9% on a pro forma basis) for the comparable period in 1998. Such increase in the effective tax rate was primarily attributable to the increase in goodwill amortization expense (which is primarily non-deductible), the write-down of four non-core business units to net realizable value, and the non-deductible investment banking fee paid in the third quarter.
RESULTS OF OPERATIONS -- DISCONTINUED OPERATIONS
In April 1999, Century adopted a formal plan to divest its risk-bearing specialty insurance segment, which was no longer part of CBIZ's strategic long-term growth objectives. The risk-bearing specialty insurance segment, which included Century Surety Company, Evergreen National Indemnity Company, and Continental Heritage Insurance Company, was reported as a discontinued operation and its net assets and results of operations were reported separately in the consolidated financial statements.
In June 2000, CBIZ announced that it had entered into a binding agreement with Avalon National Corporation for the sale of its risk-bearing specialty insurance segment, as well as American Inspection and Audit Services, Inc. and CSC Insurance Agency, Inc., collectively referred to as the Divested Entities for $31 million, subject to regulatory approval. In July 2000, ANC assigned its rights under the purchase agreement to Pro
Finance Holdings Corporation, which is a consortium of financial entities, and certain former members of CBIZ's management.
In October 2000, CBIZ renegotiated the aforementioned sale agreement with Pro Finance Holding Corporation. In consideration for a $2.0 million reduction in sale proceeds, CBIZ was able to restructure the agreement for tax purposes that provided CBIZ a significant tax benefit. Furthermore, the sale proceeds were reduced by an additional $1.0 million due to severance and bonus payments due at the Divested Entities. Accordingly, in October 2000, CBIZ completed the sale of the Divested Entities for $28 million.
COMBINED AND OPERATING RATIOS
The following information represents the required disclosures for the Divested Entities at December 31, 1999 and 1998, and for the years then ended. Assets and liabilities are included in net assets of discontinued operations in the accompanying consolidated balance sheets, and operating results are included in income (loss) from operations of discontinued business in the accompanying consolidated statements of operations.
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, loss expense (LAE), expense, combined, net investment and operating ratios of Century on a generally accepted accounting principles (GAAP) basis for each of the years ended December 31, 1999 and 1998.
EXPENSES
The expense ratio reflected in the foregoing table is the relationship of operating costs to net written premiums on a GAAP basis. The statutory ratio differs from the GAAP ratio as a result of different treatment of acquisition costs. Expense ratios were unfavorably impacted by reinsurance contingencies in 1999, and were favorably impacted by reinsurance contingencies in 1998.
LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLE
As of December 31, 1999, the liability for losses and LAE constituted 31% of CBIZ's consolidated liabilities. CBIZ had established reserves that reflected its estimates of the total losses and LAE it will ultimately be required to pay under insurance and reinsurance policies. Such reserves included losses that were reported but not settled and losses that were incurred but not reported (IBNR). Loss reserves were established on an undiscounted basis after reductions for deductibles and estimates of salvage and subrogation.
For reported losses, CBIZ established reserves on a "case" basis within the parameters of coverage provided in the related policy. For IBNR losses, CBIZ estimated reserves using established actuarial methods. Case and IBNR loss reserve estimates reflected such variables as past loss experience, social trends in damage awards, changes in judicial interpretation of legal liability and policy coverages, and inflation. CBIZ took into account not only monetary increases in the cost of what is insured, but also changes in societal factors that influenced jury
verdicts and case law and, in turn, claim costs. CBIZ's loss reserves were certified in accordance with the requirements of the National Association of Insurance Commissioners.
The consolidated financial statements of CBIZ included the estimated liability for unpaid losses and LAE of CBIZ's insurance operations. Reserves for unpaid losses covered by insurance policies and bonds consisted of reported losses and IBNR losses. These reserves were determined by claims personnel and the use of actuarial and statistical procedures and they represented undiscounted estimates of the ultimate cost of all unpaid losses and LAE through year-end. Although management used many resources to calculate reserves, a degree of uncertainty was inherent in all such estimates. Therefore, no precise method for determining ultimate losses and LAE exists. These estimates were subject to the effect of future claims settlement trends and were continually reviewed and adjusted (if necessary) as experience develops and new information becomes known. Any such adjustments were reflected in current operations.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
Cash and cash equivalents decreased $8.7 million to $16.0 million at December 31, 2000, from $24.7 million at December 31, 1999. Most of the reduction resulted from an initiative in 2000 to consolidate multiple bank accounts to three primary depository banks.
Net cash provided by operating activities was $17.5 million in 2000 versus a use of cash of $25.9 million in 1999, an increase of $43.4 million. Adjusting net income for non-cash operating expenses, but before considering changes in assets and liabilities, net cash generated from continuing operations was $62.9 million in 2000 versus $72.3 million in 1999. Changes in assets and liabilities resulted in a net use of cash of $45.5 million in 2000 versus $98.2 million in 1999; most of the reduction in use is related to the net change in accounts receivable $36.7 million.
Cash provided by investing activities in 2000 consisted primarily of proceeds received from divestitures, offset by cash used for capital expenditures and the funding of acquisitions and contingent consideration for previous acquisitions. Cash used in investing activities in 2000 and 1999 consisted primarily of payments for business acquisitions (and contingent consideration) and purchases of fixed assets. Significant purchases of fixed assets in 1999 and 2000 were primarily attributable to the purchase of software from Oracle and related capital costs incurred to implement the enterprise-wide solution to integrate back office operations.
Cash used in financing activities in 2000 consisted primarily of payments made on the revolving credit facility (net of proceeds) and notes payable and capitalized leases. Cash provided by financing activities in 1999 consisted primarily of proceeds of $43.8 million from stock issuances and exercise of stock options and warrants, proceeds from the revolving credit facility (net of repayments) of $100.0 million, and payments on notes payable and capital leases (net of proceeds) of $43.0 million.
SOURCES OF CASH
CBIZ's principal source of revenue is derived from the collection of fees from professional services rendered to its clients and commissions earned in the areas of accounting, tax, valuation and advisory services, benefits administration and insurance services, human resources and payroll services, performance consulting services and technology solutions.
CBIZ's bank line of credit is a $172 million revolving credit facility with several financial institutions, of which $117.5 million was outstanding at December 31, 2000. During 2000, CBIZ utilized cash from operations to pay down its facility by $26.5 million. See Notes 6 and 18 to CBIZ's consolidated financial statements included herewith.
USES OF CASH AND LIQUIDITY OUTLOOK
CBIZ's capital expenditures from continuing operations totaled $20.1 million, $33.7 million and $13.2 million for the years ended December 31, 2000, 1999 and 1998, respectively, which included expenditures for fixed
assets for normal replacement, compliance with regulations and market development. During the year ended December 31, 2000, CBIZ primarily funded capital expenditures from operating cash flow and financing activities. CBIZ anticipates that during 2001, it will continue to fund expenditures from operating cash flow supplemented by borrowings under its revolving credit facility, as necessary. Management believes that CBIZ currently has sufficient cash and lines of credit to fund current operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Quantitative Information About Market Risk. CBIZ's exposure to market risk, including interest rate risk, is not significant. If market interest rates were to increase or decrease immediately and uniformly by 100 basis points from levels at December 31, 2000, in each case the impact on CBIZ's financial condition and results of operations would not be significant. CBIZ does not engage in trading market risk sensitive instruments. CBIZ does not purchase as investments, hedges or for purposes "other than trading" instruments that are likely to expose CBIZ to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. CBIZ has not issued debt instruments, entered into forward or futures contracts, purchased options or entered into swaps.
Qualitative Information About Market Risk. CBIZ's primary market risk exposure is that of interest rate risk. A change in the Federal Funds Rate, or the reference rate set by the Bank of America (San Francisco), would affect the rate at which CBIZ could borrow funds under its credit facility.
CBIZ's strategy to manage this exposure is to keep its borrowings to a minimum.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of Directors" in CBIZ's definitive proxy statement relating to the 2001 Annual Stockholders Meeting is incorporated herein by reference.
The following table sets forth certain information regarding the directors, executive officers and certain key employees of CBIZ. Each executive officer of CBIZ named in the following table has been elected to serve until his successor is duly appointed or elected or until his earlier removal or resignation from office. No arrangement or understanding exists between any executive officer of CBIZ and any other person pursuant to which he or she was selected as an officer.
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(1) Member of Management Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Mr. Lowenstein is retiring at the expiration of his current term as a director, on at the 2001 annual meeting of stockholders.
EXECUTIVE OFFICERS AND DIRECTORS:
Michael G. DeGroote has served as Chairman of the Board of CBIZ since April 1995. Mr. DeGroote also served as Chief Executive Officer and President of CBIZ from April 1995 to October 1996 and from November 1997 to April 1999. Since April 1999 to October 2000, Mr. DeGroote has served as Chief Executive Officer. Mr. DeGroote served as Chairman of the Board, President and Chief Executive Officer of Republic Industries, Inc., now known as AutoNation, Inc., from May 1991 to August 1995. Mr. DeGroote founded Laidlaw Inc., a Canadian waste services and transportation company in 1959. In 1988, Mr. DeGroote sold his controlling
interest in Laidlaw to Canadian Pacific Limited. Mr. DeGroote served as President and Chief Executive Officer of Laidlaw from 1959 until 1990. Mr. DeGroote currently serves on the Board of Directors of AutoNation, Inc.
Steven L. Gerard was appointed Chief Executive Officer and Director on October 12, 2000. Mr. Gerard was Chairman and CEO of Great Point Capital, Inc., a provider of operational and advisory services from 1997 to October 2000. From 1991 to 1997, he was Chairman and CEO of Triangle Wire & Cable, Inc. and its successor Ocean View Capital, Inc. Mr. Gerard's prior experience includes 16 years with Citibank, N.A. in various senior corporate finance and banking positions, including ultimately Senior Managing Director, responsible for the risk management of Citibank's commercial and investment banking activities in the United States, Europe, Australia and Japan . Further, Mr. Gerard served seven years with the American Stock Exchange, where he last served as Vice President of the Securities Division. Mr. Gerard also serves on the Boards of Directors of Fairchild Company, Inc., Lennar Corporation and Aviation Sales Company.
Jerome P. Grisko, Jr. has served as President of CBIZ since February 1, 2000, Mr. Grisko joined CBIZ as Vice President, Mergers & Acquisitions in September 1998 and was promoted to Senior Vice President, Mergers & Acquisitions and Legal Affairs in December of 1998. Prior to joining CBIZ, Mr. Grisko was associated with the law firm of Baker & Hostetler LLP, where he practiced from September 1987 until September 1998, serving as a partner of such firm from January 1995 to September 1998. While at Baker & Hostetler, Mr. Grisko concentrated his practice in the area of mergers, acquisitions and divestitures. Mr. Grisko is a member of the American, Ohio and Cleveland Bar Associations.
Ware H. Grove has served as Senior Vice President and Chief Financial Officer of CBIZ since December, 2000. Before joining CBIZ, Mr. Grove served as Senior Vice President and Chief Financial Officer of Bridgestreet Accommodations, Inc., which he joined in early 2000 to restructure financing, develop strategic operating alternatives, and assist with merger negotiations. Prior to joining Bridgestreet, Mr. Grove served for three years as Vice President and Chief Financial Officer of Lesco, Inc. In 1994, Mr. Grove joined Revco D.S., Inc., as Vice President and Treasurer. During his tenure at Revco, a publicly held company acquired by CVS Corporation in 1997, Mr. Grove helped integrate an acquisition that doubled Revco's size and restructured the company's credit facility. Since beginning his career in corporate finance in 1972, Mr. Grove has held various financial positions with large companies representing a variety of industries, including Computerland/Vanstar, a privately held, $2.5 billion worldwide computer sales and distribution company Manville Corporation, The Upjohn Company; and First of America Bank.
Douglas R. Gowland has served as a Senior Vice President since November 1997. Mr. Gowland served as a Director of CBIZ from April 1995 through November 1997. From April 1995 until October 1996, Mr. Gowland served as CBIZ's Executive Vice President and Chief Operating Officer. From January 1992 to April 1995, Mr. Gowland served as Vice President -- Hazardous Waste Operations of Republic Industries, Inc., the predecessor of AutoNation, Inc. From March 1991 to January 1992, Mr. Gowland served as Vice President of DRG Environmental Management, Inc. Prior thereto, he served as President of Great Lakes Environmental Systems, Ltd.
Robert A. O'Byrne has serves as a Senior Vice President of CBIZ since December 1998 and is in charge of the Benefits Administration & Insurance Services Group. Mr. O'Byrne served as Chairman of the Board and Chief Executive Officer of Robert D. O'Byrne and Associates, Inc., an employee benefits brokerage/consulting firm prior to its acquisition by CBIZ in December 1997. Mr. O'Byrne remains President of CBIZ Benefits and Insurance Services, Inc.
Rick L. Burdick has served as a Director of CBIZ since November 1997, when he was elected as an outside director. Mr. Burdick has been a partner at the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. since April 1988. Mr. Burdick serves on the Board of Directors of AutoNation, Inc.
Joseph S. DiMartino has served as a Director of CBIZ since November 1997, when he was elected as an outside director. Mr. DiMartino has been Chairman of the Board of the Dreyfus Family of Funds since January 1995. Mr. DiMartino served as President, Chief Operating Officer and Director of The Dreyfus Corporation from October 1982 until December 1994 and also served as a director of Mellon Bank Corporation.
Mr. DiMartino also serves on the Board of Directors of Quikcat.com, Health Plan Services Corporation, Carlyle Industries, Inc.; and the Muscular Dystrophy Association.
Harve A. Ferrill has served as a Director of CBIZ since October 1996, when he was elected as an outside director. Mr. Ferrill has served as Chief Executive Officer of Advance Ross Corporation, a company that provides tax refunding services ("ARC"), since 1991. Mr. Ferrill served as President of Advance Ross Corporation from 1990 to 1993 and as Chairman of the Board from 1992 to 1996. Since 1996, Advance Ross Corporation has been a wholly-owned subsidiary of Cendant Corporation since 1996. Mr. Ferrill has served as President of Ferrill- Plauche Co., Inc., a private investment company, since 1982. Mr. Ferrill also serves on the Board of Directors of Gaylord Container Corporation.
Richard C. Rochon has served as a Director of CBIZ since October 1996, when he was elected as an outside director. Mr. Rochon has served since 1988 as President of Huizenga Holdings, Inc., a management and holding company for diversified investments in operating companies, joint ventures and real estate, on behalf of its owner, Mr. H. Wayne Huizenga. Mr. Rochon also has served as a director since September 1996 and as Vice Chairman since April 1997 of Boca Resorts, Inc., the owner and operator of luxury resort properties.. From 1985 until 1988, Mr. Rochon served as Treasurer of Huizenga Holdings, Inc. and from 1979 until 1985, he was employed as a certified public accountant by the international public accounting firm of Coopers & Lybrand, L.L.P.
OTHER KEY EMPLOYEES:
Leonard Miller has served as CBIZ Business Solutions Practice Head since November 2000. 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, which was responsible for 11 offices in Chicago, Illinois for 15 years prior to co-founding Miller Wagner & Company, Ltd. With over 38 years of experience, Mr. Miller is a recognized expert in the fields of finance, real estate, general business consulting and various litigation support matters. Professional affiliations include the American Institute of Certified Public Accountants, the Arizona Society of Certified Public Accountants and the Illinois Society of Certified Public Accountants (ISCPA).
Teresa E. Bruce has served as Vice President of Human Resources since January 1999. From 1998 to 1999 Ms. Bruce served as Director of Human Resources for Robert D. O'Byrne & Associates, Inc. and The Grant Nelson Group, Inc., subsidiaries of CBIZ now known as CBIZ Benefits and Insurance Services, Inc. Ms. Bruce has over 13 years of experience in human resources and is an active member of the Greater Kansas City Chapter of The Human Resources Management Association and Society of Human Resources Management.
Chris Spurio has served as Vice President of Finance since July 1999. Previously, Mr. Spurio was Controller since January 1998. Mr. Spurio also served as Acting Chief Financial Officer from May 2000 to November 2000. Mr. Spurio was associated with KPMG LLP, an international accounting firm, from July 1988 to January 1998, serving as a Senior Manager of such firm from July 1995 to January 1998. Mr. Spurio is a CPA and a member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.
Kelly J. Kuna has served as Corporate Controller since July 1999. Mrs. Kuna served as Manager of External Reporting from December 1998 to June 1999. Prior to joining CBIZ, Mrs. Kuna was associated with KPMG LLP, an international accounting firm, from 1992 to December 1998, serving as a Senior Manager of such firm from July 1998 to December 1998. Mrs. Kuna is a CPA and a member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.
Michael W. Gleespen has served as Corporate Secretary since March 2001. Mr. Gleespen is an attorney and has served as CBIZ's Vice President of Regulatory Compliance and Accountancy Compliance Officer and Technical Director since February 1998. Prior to joining CBIZ, Mr. Gleespen was an Assistant Ohio Attorney General in the Business & Government Regulation Section and the Court of Claims Defense Section from 1988 until 1998, during which time he was counsel to the 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.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference to CBIZ's definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of CBIZ's fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference to CBIZ's definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of CBIZ's fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain agreements and transactions between or among CBIZ and certain related parties. It is CBIZ's policy to enter into transactions with related parties on terms that, on the whole, are no less favorable than those that would be available from unaffiliated parties. Based on CBIZ's experience and the terms of its transactions with unaffiliated parties, it is the Board of Directors' belief that the transactions described below met these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in properties owned indirectly by and leased from persons employed by CBIZ. In the aggregate, in 2000, CBIZ paid approximately $1.5 million under such leases, which were at competitive market rates.
A director of CBIZ is a partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P. Akin, Gump performed legal work for CBIZ during 2000 for which the firm received approximately $116,000 from CBIZ.
PART IV
ITEM 14.
ITEM 14. 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 of this Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to "Index to Financial Statements" on page 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.
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* Indicates documents filed herewith.
(b) Reports on Form 8-K
Century Business Services, Inc. filed the following Current Reports on Form 8-K during the three months ended December 31, 2000:
Current Report on Form 8-K filed October 17, 2000. The Current Report covered the following items:
On September 26, 2000, Mr. Joseph J. Plumeri, Jr. resigned his position as Lead Director to pursue other interests.
On October 6, 2000, Century completed the sale of the risk-bearing insurance division previously announced.
On October 12, 2000, Century announced the appointment of Steven L. Gerard as Chief Executive Officer and Director.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Century has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CENTURY BUSINESS SERVICES, INC. (Registrant)
By: /s/ WARE H. GROVE ------------------------------------ Ware H. Grove Chief Financial Officer March 30, 2001
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below on this Annual Report hereby constitutes and appoints Steven L. Gerard and Ware Grove, and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution for him and his name, place and stead, in all capacities (until revoked in writing), to sign any and all amendments to this Annual Report of Century Business Services, Inc. and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that each attorney-in-fact and agent, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report has been signed below by the following persons on behalf of Century Business Services, Inc. and in the capacities and on the date indicated above.
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Century Business Services, Inc.:
We have audited the consolidated financial statements of Century Business Services, Inc. and Subsidiaries (Company) as listed in the accompanying index on page. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedules as listed in the accompanying index on page. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Century Business Services, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in note 1 and note 14 to the consolidated financial statements, the Company adopted Staff Accounting Bulletin No. 101 and changed certain revenue recognition policies effective January 1, 2000.
/s/ KPMG LLP
Cleveland, Ohio March 6, 2001, except as to paragraph 1 of note 18, which is as of March 30,
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
See the accompanying notes to the consolidated financial statements.
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
See the accompanying notes to the consolidated financial statements.
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
See the accompanying notes to the consolidated financial statements.
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
See the accompanying notes to the consolidated financial statements.
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Century Business Services, Inc. and subsidiaries (CBIZ) is a diversified services company, which, acting through its subsidiaries, provides professional outsourced business services primarily to small and medium-sized businesses, as well as individuals, governmental entities, and not-for-profit enterprises throughout the United States and Toronto, Canada. CBIZ offers integrated services in the following areas: accounting, tax, valuation, and advisory services; benefits administration and insurance services; human resources and payroll services; performance consulting services; and information technology services.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of CBIZ and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Accounting Estimates
In preparing the consolidated financial statements, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term highly liquid investments with a maturity of three months or less at the date of purchase. The carrying amount approximates fair value because of the short maturity of those instruments.
Restricted Cash and Funds Held for Clients
Restricted cash represents funds on deposit from clients related to its payroll and payroll tax filing services, and insurance related services. In addition, a portion of restricted cash pertains to fees earned by CBIZ in relation to its capital and investment advisory services, those funds are restricted in accordance with applicable NASD regulations.
As part of its payroll and payroll tax filing services, CBIZ is engaged in the preparation of payroll checks, federal, state, and local payroll tax returns, and the collection and remittance of payroll obligations. In relation to its payroll services, CBIZ collects payroll funds from its client's account in advance of paying the client's employees. Likewise, for its payroll tax filing services, CBIZ collects payroll taxes from its clients in advance of paying the various taxing authorities. Those funds that are collected before they are due are invested in short-term investment grade instruments. The funds held for clients and the related client fund obligations are included in the consolidated balance sheets as current assets and current liabilities, respectively. The amount of collected but not yet remitted funds for CBIZ's payroll and tax filing services varies significantly during the year.
For its insurance business, funds on deposit from clients pertains to the administering and settling of claims, and the pass through of insurance premiums to the insurance carrier. A related liability for these funds is recorded in accrued expenses in the consolidated balance sheets.
Other Financial Instruments
The carrying amount of CBIZ's accounts receivable and payables approximates fair value because of the short maturity of these instruments. The carrying value of bank debt approximates fair value. The interest rate on the bank debt is variable and approximates current market rates.
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Goodwill
Goodwill is being amortized on a straight-line basis over the expected periods to be benefited. During the fourth quarter of 1999, CBIZ shortened its goodwill amortization period from periods up to 40 years to 15 years, beginning October 1, 1999. It is CBIZ's policy to evaluate continually the period of amortization and recoverability of goodwill based on an evaluation of such factors as the occurrence of 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 than the carrying amount of the asset. An impairment loss would be recorded in the period such determination is made based on the fair value of the related businesses. In 2000, CBIZ recorded a goodwill impairment charge of $48.2 million associated with eleven business units. CBIZ also recorded a $27.2 million goodwill write-down in 2000 resulting from the divestiture of two business units and the planned divestiture of two additional business units. See notes 13 and 15 for additional information regarding these charges. Amortization expense from continuing operations was approximately $29.2 million, $12.7 million and $4.8 million in 2000, 1999 and 1998, respectively.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line basis over estimated useful lives.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Revenue Recognition and SAB 101
During the fourth quarter of 2000, CBIZ adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognized in Financial Statements." SAB 101 summarizes certain of the Commission's views in applying generally accepted accounting principles to revenue recognition in financial statements. In light of the guidance given by SAB 101 and the SEC's "Frequently Asked Questions and Answers" bulletin released on October 12, 2000, CBIZ changed certain revenue recognition policies effective January 1, 2000.
Due to this change, CBIZ recorded a cumulative adjustment in the first quarter 2000 of $11.9 million (net of tax benefit of $7.9 million). The impact in 2000 of adopting SAB 101 resulted in a reduction in revenue of approximately $18.2 million, a reduction in operating expense of approximately $11.4 million, and a reduction in income from continuing operations (before cumulative effect of accounting change) of approximately $6.8 million (pretax). See note 5 for the impact on deferred taxes and note 15 for the impact on previously reported quarterly financial information.
Revenues consist primarily of fees for preparation of tax returns, consulting services, brokerage and agency commissions, and fee income for administering health and retirement plans. Revenues are recorded in the period in which they are earned. CBIZ bills clients based upon a predetermined agreed upon fixed fee or actual hours incurred on client projects at expected net realizable rates per hour, plus any out-of-pocket expenses. All reimbursements of out-of-pocket expenses are netted against the related expense item and reported in "operating expenses" in the consolidated statements of operations. The cumulative impact on any subsequent revision in the
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
estimated realizable value of unbilled fees for a particular client project is reflected in the period in which the change becomes known. Commissions relating to brokerage and agency activities whereby CBIZ has primary responsibility for the collection of premiums from insureds are generally 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 are generally recognized when the amounts are determined. Commission revenues are reported net of sub-broker commission. Contingent commissions are generally recognized at the earlier of notification from the carrier, or receipt of payment. Fee income is recognized as services are rendered, with the exception of fees related to CBIZ's physician practice management services, which are recognized when collections are received on our clients' accounts.
Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted earnings per share include the dilutive effect of stock options, warrants and contingent shares.
Stock Options
Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. CBIZ provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method had been applied. See note 9 to the consolidated financial statements.
Recent Accounting Pronouncements
Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives are to be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. We plan on adopting SFAS No. 133 on January 1, 2001; and do not believe that the adoption will have a material effect on our financial condition or results of operations.
Reclassifications
Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current year's presentation.
2. ACQUISITIONS
During fiscal 2000, CBIZ acquired two businesses that were accounted for under the purchase method of accounting, and accordingly, the operating results of the acquired companies have been included in the accompanying consolidated financial statements since the dates of acquisition. The aggregate purchase price of these acquisitions was approximately $2.5 million, comprised of $1.4 million in cash, a $0.8 million note payable, and 39,209 shares of restricted common stock (estimated fair value of $0.3 million at acquisition). The aggregate purchase price has been allocated to the net assets of the acquired companies based upon their respective fair market values. The excess of the purchase price over fair value of net assets acquired (goodwill) approximated $3.4 million and is being amortized over a 15-year period.
During fiscal 1999, CBIZ acquired thirty-five complementary businesses, thirty of which were accounted for under the purchase method of accounting, and accordingly, the operating results of the acquired companies have been included in the accompanying consolidated financial statements since the dates of acquisition. The aggregate
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
purchase price of these acquisitions was approximately $77.7 million, comprised of $29.7 million in cash, $0.5 million in assumed liabilities, and 5.6 million shares of restricted common stock (estimated fair value of $47.5 million at acquisition). The aggregate purchase price excludes future contingent consideration of up to $21.7 million, comprised of $10.1 million in cash and notes and 1.5 million shares of restricted common stock (estimated stock value of $11.6 million at acquisition), which is based on the acquired companies' ability to meet or exceed certain performance goals. The aggregate purchase price, excluding future contingent consideration, has been allocated to the net assets of the acquired companies based upon their respective fair market values. The excess of the purchase price over fair value of net assets acquired (goodwill) approximated $71.9 million and is being amortized over a 15-year period.
As a result of the nature of the assets and liabilities of the businesses acquired, there were no material identifiable intangible assets or liabilities. Future contingent consideration is recorded as additional purchase price when performance goals have been met and shares and cash have been released from escrow.
The pro forma revenue and results of operations for the two acquisitions completed in fiscal 2000, had the acquisitions occurred at the beginning of 2000 and 1999, are not significant, and accordingly, have not been provided.
Several pooling-of-interests transactions completed in prior years involved enterprises that previously had not been subjected to income taxes. Accordingly, pro forma adjustments have been presented in the table below (in thousands).
3. INVESTMENTS
Included in other assets (non-current) at December 31, 2000 and 1999, are investments accounted for under the cost method of accounting of $2.7 million and $2.5 million, respectively. CBIZ acquired an ownership interest of approximately 20% in Fundscape.com, which was being accounted for under the equity method in 1999. At December 31, 1999, CBIZ's investment in Fundscape.com was $0.8 million, which includes its proportionate share of Fundscape.com's operating losses for 1999 of $0.2 million. In 2000, CBIZ's ownership interest dropped to approximately 11% and is currently being accounted for under the cost method. CBIZ also has a 3% ownership interest in QuikCAT.com, which is being accounted for under the cost method. At December 31, 2000 and 1999, CBIZ's investment in QuikCAT.com was $1.8 million. In addition, CBIZ has an outstanding trade receivable from QuikCAT.com of $0.5 million and $1.3 million at December 31, 2000, and 1999, respectively. Although the market value of CBIZ's investments in Fundscape.com and QuikCAT.com are not readily determinable, management believes the fair value of these investments exceeds their carrying amounts.
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net at December 31, 2000 and 1999 consisted of the following (in thousands):
Depreciation and amortization expense was approximately $15.2 million in 2000, $10.8 million in 1999 and $6.3 million in 1998.
5. INCOME TAXES
A summary of income tax expense (benefit) included in the consolidated statements of operations is as follows (in thousands):
The provision for income taxes attributable to earnings (loss) from continuing operations differed from the amount obtained by applying the federal statutory income tax rate to income (loss) from continuing operations before income taxes, as follows (in thousands):
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities from continuing operations at December 31, 2000 and 1999, are as follows (in thousands):
CBIZ had U.S. net operating loss (NOL) carryforwards of approximately $5,489,000 and $5,135,000 at December 31, 2000 and 1999, respectively, from the separate return years of certain acquired entities. These losses are subject to limitations regarding the offset of CBIZ's future taxable income and will begin to expire in 2007. CBIZ also had Canadian NOL carryforwards of approximately $3,580,000 and $0 for the years ended December 31, 2000 and 1999, respectively. The Canadian NOL carryforwards begin to expire in 2006.
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. CBIZ determines a valuation allowance based on its analysis of amounts available in the statutory carryback period, consideration of future deductible amounts, and assessment of the separate company profitability of certain acquired entities. CBIZ has established valuation allowances for portions of the U.S. and Canadian NOL carryforwards. The net change in the valuation allowance for the years ended December 31, 2000 was an increase of $420,000. The net change included a $700,000 increase that was recorded as an addition to income tax expense, and a $280,000 decrease that was recorded as a reduction of acquired intangible assets. 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 $476,000 and $756,000 at December 31, 2000 and 1999, respectively.
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6. BANK DEBT, NOTES PAYABLE AND CAPITALIZED LEASES
Bank debt, notes payable and capitalized leases, consist of the following (in thousands):
CBIZ has a $172 million revolving credit facility with a group of 12 banks. See Note 18 for discussion regarding the amendment to the bank credit agreement. Under the facility, loans are charged an interest rate consisting of a base rate (offshore or domestic) plus an applicable margin. Additionally, a commitment fee of 35 to 50 basis points is charged on the unused portion of the facility. Borrowings and commitments by the banks under the credit facility mature in August 2004. As security for the payment of the credit facility, CBIZ has assigned to the lending group a continuing security interest in accounts receivables and stock of its subsidiaries, except for accounts receivable with any governmental authority.
The bank credit agreement contains certain financial covenants. These covenants require the Company to maintain (i) a minimum consolidated net worth; (ii) consolidated leverage ratio; and (iii) a minimum interest coverage ratio. As a result of an Amendment to its credit facility, completed March 30, 2001, CBIZ is in compliance with its covenants as of December 31, 2000. See Note 18 for discussion of the amendment to the bank credit agreement.
The bank credit agreement also places significant restrictions on CBIZ's ability to create liens or other encumbrances, to make certain payments (including dividends), investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets, or to merge or consolidate with an unaffiliated entity. The agreement contains a provision that, in the event of a defined change in control, the agreement may be terminated.
At December 31, 2000, aggregate maturities of notes payable, bank debt and capitalized leases, were as follows (in thousands):
Management believes that the carrying amounts of bank debt, notes payable and capitalized leases recorded at December 31, 2000 approximate fair values.
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7. COMMITMENTS AND CONTINGENCIES
Operating Leases
CBIZ leases certain of its premises and equipment under various operating lease agreements. At December 31, 2000, future minimum rental commitments becoming payable under all operating leases are as follows (in thousands):
Total rental expense incurred under operating leases was approximately $27.4 million, $26.3 million, and $15.8 million in 2000, 1999 and 1998, respectively.
Legal Proceedings
Since September 1999, seven purported stockholder class-action lawsuits were filed as follows: (i) Jim A. Darby, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda, Edward F. Feighan and Douglas R. Gowland, Case No. 1:99CV2200; (ii) Joy Iannotta v. Century Business Services, Inc., Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda, Edward F. Feighan and Douglas R. Gowland, Case No. 1:99CV2337; (iii) Robert M. DeBolt, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda, Edward J. Feighan and Douglas R. Gowland, Case No. 1:99CV2467 (subsequently consolidated into a single case, Jim A. Darby, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote, Keith W. Reeves, Charles D. Hamm, Jr., Craig L. Stout, Gregory J. Skoda and Edward F. Feighan, Case No. 1:99CV2200); (iv) David Gochman, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote and Fred M. Winkler, Case No. 1:00CB0386; (v) Scott Korn, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc. Michael G. DeGroote and Fred M. Winkler, Case No. 1:00CV0440 and; (vi) Joe Marsh, Lee Marshall, Flats Entertainment, Inc., Bruce Kapp and Dave Kajganich, Individually and on Behalf of All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote, Fred M. Winkler, Charles D. Hamm, Jr., Jerry Grisko and Keith W. Reeves, Case No. 1:00CV0584, each filed in the United States District Court for the Northern District of Ohio against CBIZ and certain of its current and former directors and officers; and (vii) Talbot Jones Albert, IV, on Behalf of Himself and All Others Similarly Situated v. Century Business Services, Inc., Michael G. DeGroote and Fred M. Winkler, Case No. JFM00CV565, filed in the United States District Court for the District of Maryland against CBIZ and certain of its current and former directors and officers. The plaintiffs in each of these cases alleged that the named defendants violated certain provisions of the Securities Exchange Act of 1934 and certain rules promulgated thereunder in connection with certain statements made during various periods from February 1998 through January 2000 by, among other things, improperly amortizing goodwill and failing adequately to monitor changes in operating results. The complaints seek damages in unspecified amounts.
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CBIZ and the named officer and director defendants moved the United States District Court in the Northern District of Ohio to consolidate the six Ohio cases into a single action and appoint a single lead plaintiff and counsel and require the filing of a consolidated amended complaint. The United States District Court agreed, and is in the process of consolidating the cases and receiving motions from the various plaintiffs regarding who will serve as lead plaintiff and lead counsel.
CBIZ and the named officer and director defendants filed an agreed motion with the plaintiffs in the Maryland action to transfer that case from the District of Maryland to the Northern District of Ohio. CBIZ and the named officer and director defendants also filed a motion with the Northern District of Ohio to assign the case to District Judge Matia and consolidate it with the already-consolidated Ohio cases. Each of these motions has been granted, and the Maryland case has been consolidated into the other class action cases before District Judge Matia.
There has been no discovery in any of these actions.
CBIZ and the named officer and director defendants deny all allegations of wrongdoing made against them in these actions and intend to vigorously defend each of these lawsuits. Although the ultimate outcome of such litigation is uncertain, based on the allegations contained in the complaints, management does not believe that these lawsuits will have a material adverse effect on the financial condition, results of operations or cash flows of CBIZ.
On or about May 6, 2000, certain former shareholders of a company acquired by Century filed suit -- Hanan et al. v. Century Business Services, Inc. and Gregory J. Skoda, Case No. 407495 (Ohio Ct. Common Pleas) -- alleging that the Company fraudulently induced them to enter into merging with the company and breached the Agreement and Plan of Merger and Executive Employment Agreements plaintiffs entered into in connection with the merger. On July 31, 2000 the Company moved to dismiss the Complaint. On October 10, 2000, the Court denied Century's motion to dismiss, and on December 12, 2000, Century filed its answer and counterclaim against the plaintiffs. Discovery in this action has commenced, and a trial on the employment agreements is scheduled to commence on May 21, 2001. No trial date has been set on the remaining issues in this case. Plaintiffs have not specified the amount of damages they seek to recover.
The Company and the named former officer defendant deny all allegations of wrongdoing made against them in these actions and intend to vigorously defend this lawsuit. Although the ultimate outcome of such litigation is uncertain, based on the allegations contained in the complaints, management does not believe that these lawsuits will have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
On February 25, 2000, Century filed suit in the Missouri Circuit Court of the County of St. Louis against all of the former shareholders of a company it acquired in 1999, alleging breach of contract and fraud in connection with Agreement and Plan of Merger. On March 31, 2000, two of the defendants filed a counterclaim against the Company, alleging breach of contract, fraud, and violations of Section 12(2) of the Securities Act. On May 10, 2000, the same shareholders who filed the counterclaim against Century in the Missouri State Court filed suit against Century and 10 of its current and former officers and directors -- Fuchs et al. v. Century Business Services, Inc., Michael G. DeGroote, Charles D. Hamm, Jr., Fred M. Winkler, Daniel J. Clark, Jerome P. Grisko, Jr., Rick L. Burdick, Joseph S. DiMartino, Harve A. Ferrill, Hugh P. Lowenstein, and Richard C. Rochon, Case No. 1:00 CV 1193 (N.D. Oh.) -- alleging the same wrongdoing and that the named defendants violated Sections 10(b) and 20(a) of the Exchange Act and 12(2) and 15(a) of the Securities Act by making materially false statements contained in the SEC documents provided to the plaintiffs in connection with the Agreement and Plan of Merger as well as misrepresentation claims under the common law.
On July 31, 2000, Century moved to dismiss the federal action. While the motion was pending, the parties recently settled all of the litigation between them on confidential terms that management believes were favorable to the Company.
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On April 11, 2000, Century and a wholly-owned subsidiary initiated a lawsuit in Toronto, Canada against former owners of a business acquired by Century, claiming (1) that the former owner breached representations and warranties in the purchase agreement and (2) that a company owned by one of the shareholders owed Century payment for services rendered. CBIZ E-Solutions, Inc. and Century Business Solutions, Inc. v. Paven R. Bratch, Review Worldwide Ltd., 1069904 Ontario Limited and Royal Bank of Canada Financial Corp. in its capacity and acting on behalf of The Bratch International Trust, Ontario Superior Ct. No. 00-CV-188556. In addition, Century asked the Ontario Court to declare that Century justifiably terminated the employment contract of one of the former shareholders. On August 1, 2000 the former shareholders and the company owned by a former shareholder filed counterclaims against Century in the Ontario action, seeking damages from Century for breach of contract, wrongful termination of employment, and defamation. The parties recently settled all of the litigation between them on confidential terms that management believes were favorable to the Company.
In addition to the above-disclosed items, the Company 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 the Company.
8. EMPLOYEE BENEFITS
CBIZ 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 plans in 2000, 1999 and 1998, amounted to approximately $5.6 million, $4.7 million, and $2.5 million, respectively.
Two acquisitions made in 1998 and 1999 had employee stock option plans (ESOP) which were subsequently frozen by CBIZ. The ESOP related to the 1999 was terminated in 2000, and as required under Statement of Position No. 93-6, the difference between the cost of the remaining unearned ESOP shares and the fair value of those shares of approximately $1.8 million has been charged to additional paid-in capital in the accompanying consolidated statements of stockholders' equity.
9. COMMON STOCK
CBIZ's authorized common stock consists of 250,000,000 shares of common stock, par value $0.01 per share (Common Stock). The holders of CBIZ's common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. There are no cumulative voting rights with respect to the election of directors. Accordingly, the holder or holders of a majority of the outstanding shares of Common Stock will be able to elect the directors of CBIZ then standing for election as terms expire. Holders of Common Stock have no preemptive rights and are entitled to such dividends as may be declared by the Board of Directors of CBIZ out of funds legally available therefor. The Common Stock is not entitled to any sinking fund, redemption or conversion provisions. On liquidation, dissolution or winding up of CBIZ, the holders of Common Stock are entitled to share ratably in the net assets of CBIZ remaining after the payment of any and all creditors. The outstanding shares of Common Stock are duly authorized, validly issued, fully paid and nonassessable. The transfer agent and registrar for the Common Stock is Firstar Bank, N.A.
CBIZ completes registration filings related to its Common Stock to register shares under the Securities Act of 1933. To date, CBIZ has registered the following shares of Common Stock for the following purposes: (i) approximately six million shares of our common stock, part of a Shelf Registration Statement, of which a majority has yet to be sold thereunder; (ii) $125 million in shares of our Common stock, debt securities, and warrants to purchase common stock or debt securities, of which $100 million remain available to be offered from time to time to the public under our universal shelf registration statement; and (iii) 15,000,000 shares of our Common Stock, all of which remain available to be offered from time to time in connection with acquisitions under our acquisition shelf registration statement.
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In February 1999, CBIZ issued 1,800,000 restricted shares of common stock and 900,000 warrants to an outside party for a $25 million equity investment in CBIZ. Fifty percent of the common stock is subject to a one-year lock-up restriction, while the remaining common stock is subject to a two-year lock-up restriction, and warrants to purchase shares of common stock may be exercised under the following terms: 300,000 shares for three years at $20 per share; 300,000 shares for four years at $25 per share; and 300,000 for five years at $30 per share.
In February and May of 1998, CBIZ completed a private placement in which it sold an aggregate of 3,800,000 shares of Common Stock to qualified investors at an aggregate purchase price of $13.25 per share and realized $47.7 million in proceeds.
WARRANTS
In connection with the spin off of the hazardous waste operations (including CBIZ's predecessor company) to the stockholders of Republic Industries, Inc. (the "RESI Transaction") in 1996, RESI agreed to issue to holders of unexpired warrants of its former parent, additional RESI warrants to acquire shares of RESI's Common Stock equal to one fifth of the number of shares available. At the Distribution date, RESI adjusted the per share exercise price of the RESI warrants to reflect the effect of the distribution on the market prices of RESI and its former parent's common stock. These warrants are designated as stapled warrants and expire at various dates through December 2000. The holders of these warrants are able to exercise under the original terms of the warrants and will receive Company stock.
In addition to warrants issued through the RESI Transaction, CBIZ also issued warrants in connection with private placements completed in October 1996, December 1996, and April 1997, and granted warrants in connection with certain acquisitions made during 1997. Portions of the warrants issued in connection with 1997 acquisitions are restricted from being transferred in accordance with various lock-up agreements between the former shareholders of the acquired entities and CBIZ.
During 1999, certain holders of warrants issued in connection with 1997 acquisitions gave up demand registration rights due to them. In November 1999, the Board of Directors extended the expiration dates of the aforementioned warrant holders by an additional twelve months in consideration of forgoing demand registration rights. In December 1999, the Board of Directors extended the expiration dates of certain warrants outstanding from the December 1996 and April 1997 private placements through June 2000. As consideration for the extension of the term, the holders of the warrants will pay the original exercise price, plus a premium for each month from the original expiration date to the exercise date, upon exercise of the warrants.
Information relating to warrants to purchase common stock is summarized below (in thousands):
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(a) Exercise prices for warrants outstanding at December 31, 2000 ranged from $3.875 to $30.00. Exercise prices for warrants outstanding at December 31, 1999 ranged from $1.60 to $30.00. Exercise prices for warrants outstanding at December 31, 1998 ranged from $1.075 to $13.06.
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STOCK OPTIONS
Under the 1997 Agents Stock Option Plan, a maximum of 10,000,000 options may be awarded. The purpose of the plan is to provide performance-based compensation to certain insurance agencies and individual agents who write quality surety business for CBIZ's insurance subsidiaries. The options vest only to the extent the agents satisfy minimum premium commitments and certain loss ratio performance criteria. The options terminate in June 2002, or earlier under certain conditions, including termination of the agency agreement.
Under the 1996 Employee Stock Option Plan, a maximum of 10,000,000 options may be awarded. The options awarded are subject to a 20% incremental vesting schedule over a five-year period commencing from the date of grant. The options are awarded at a price not less than fair market value at the time of the award and expire six years from the date of grant. Further, under the 1996 plan 250,000 options were granted to non-employee directors. These options became exercisable immediately upon being granted with a five-year expiration term from the date of grant.
Prior to the RESI Transaction, certain options were granted to employees, directors and affiliates of RESI's former parent company. When RESI was spun-off in April 1995 (the "Distribution Date"), optionees received options to acquire RESI Common Stock at the ratio of one RESI option for each five options under the former parent's 1990 and 1991 Stock Option plans. The outstanding options at the Distribution Date and the RESI options granted with respect thereto are stapled and are only exercisable if exercised together. As a result of the sale of RESI in July 1997, options under these plans became fully vested. These options remain vested as long as the optionee is employed by the former parent, RESI or their affiliates. The option price is based on the fair market value of the common shares on the date of grant.
Information relating to the stock option plans is summarized below (in thousands):
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(a) Options were granted at average costs of $2.98, $14.05 and $16.44 in 2000, 1999 and 1998, respectively.
(b) No options were exercised in 2000. Options were exercised at prices ranging from $1.08 to $9.63 and averaging $5.35 in 1999, and prices ranging from $1.08 to $11.00 and averaging $6.64 in 1998.
(c) Exercise price for options outstanding at December 31, 2000 ranged from $1.08 to $17.75 and averaged $8.17 with expiration dates ranging from May 2002 to December 2006. Exercise prices for options outstanding at December 31, 1999 ranged from $1.08 to $17.75 and averaged $13.83 with expiration dates ranging from June 2000 to June 2005. Exercise prices for options outstanding at December 31, 1998 ranged from $1.08 to $17.75 and averaged $13.72 with expiration dates ranging from June 2000 to October 2004.
(d) Exercise prices for options exercisable at December 31, 2000, 1999, and 1998 averaged $11.59, $11.67 and $9.25, respectively.
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Had the cost of stock option plans been determined based on the fair value of options at the grant date, CBIZ's net income and earnings (loss) per share pro forma amounts would be as follows (amounts in thousands, except per share data):
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 2000, 1999 and 1998. Below is a summary of the assumptions used in the calculation:
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10. EARNINGS (LOSS) PER SHARE
For the years presented, CBIZ presents both basic and diluted earnings per share. The following data shows the amounts used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock (amounts in thousands, except per share data). Included in potential dilutive shares are contingent shares, which represent shares issued and placed in escrow that will not be released until certain performance goals have been met.
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(a) Pro forma income (loss) data from continuing operations reflects pro forma tax adjustments for acquisitions accounted for under the pooling-of-interests transactions that were not subject to income taxes.
(b) The effect of the incremental shares from warrants, options, and contingent shares of 325 in 2000 have been excluded from diluted weighted average shares, as the net loss for the period would cause the incremental shares to be antidilutive.
Basic earnings (loss) per share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share for the years 1999 and 1998 were determined on the assumption that the options, warrants and contingent shares were exercised or earned at the beginning of the period, or at time of issuance, if later.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
During 2000, CBIZ reduced approximately $8.4 million of accruals for non-cancellable lease obligations and severance obligations due to changes in the consolidation and integration plan.
During 1999, CBIZ provided aggregate consideration of $0.5 million in the form of notes payable (to mature within one year at a specified time) in lieu of cash in conjunction with two purchases of client lists.
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During 1998, CBIZ provided aggregate consideration of $18 million in the form of notes payable in early 1999 in lieu of cash in conjunction with two purchase acquisitions. In addition, CBIZ received a $3 million note receivable in connection with the sale of M&N Risk Management and M&N Enterprise, Inc.
Cash paid during the year for (in thousands):
12. RELATED PARTIES
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 $1.5 million and $2.1 million under such leases in 2000 and 1999, respectively, which were at competitive market rates.
A director of CBIZ is a partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P. Akin, Gump performed legal work for CBIZ during 2000 for which the firm received approximately $116,000 from CBIZ.
CBIZ and/or its subsidiaries maintain joint-referral relationships and service agreements with licensed CPA firms under which CBIZ subsidiaries provide administrative services (including office, bookkeeping, accounting, and other administrative services, preparing marketing and promotion materials, and leasing of administrative and professional staff) in exchange for a fee.
13. DIVESTITURES
In April 1999, Century adopted a formal plan to divest its risk-bearing specialty insurance segment, which was no longer part of CBIZ's strategic long-term growth objectives. The risk-bearing specialty insurance segment, which included Century Surety Company, Evergreen National Indemnity Company, and Continental Heritage Insurance Company, was reported as a discontinued operation and its net assets and results of operations were reported separately in the consolidated financial statements.
In June 2000, CBIZ announced that it had entered into a binding agreement for the sale of its risk-bearing specialty insurance segment, as well as American Inspection and Audit Services, Inc. and CSC Insurance Agency, Inc. (collectively, the Divested Entities) with Avalon National Corporation (ANC) for $31 million, subject to regulatory approval. In July 2000, ANC assigned its rights under the purchase agreement to Pro Finance Holdings Corporation, (which is a consortium of financial entities), and certain former members of CBIZ's management.
In October 2000, CBIZ renegotiated the aforementioned sale agreement with Pro Finance Holding Corporation. In consideration for a $2.0 million reduction in sale proceeds, CBIZ was able to restructure the agreement for tax purposes that provided CBIZ a significant tax benefit. Furthermore, the sale proceeds were reduced by an additional $1.0 million due to severance and bonus payments due at the Divested Entities. Accordingly, in October 2000, CBIZ completed the sale of the Divested Entities for $28 million.
During fiscal 2000, CBIZ recorded a charge of $31.6 million related to a) the divestiture of three business units previously announced in December 1999, b) the sale of CBIZ's franchise operations announced on November 2, 2000, and c) loss related to the planned divestiture of two additional business units to be completed in 2001. The components of the charge recorded in fiscal 2000 are provided below:
- In the fourth quarter of 2000, CBIZ completed the sale of its franchise operation, Century Small Business Solutions, Inc. Proceeds from the were $5.4 million, which resulted in loss on sale of approximately $3.8 million.
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- In the fourth quarter of 2000, CBIZ identified two business units to be divested, the expected proceeds from which are $15.5 million (comprised of $9.5 million in cash and a $6.0 million contingent note). Based on the expected proceeds from these sales, CBIZ recorded a loss on sale of approximately $27.2 million.
- In the first quarter of 2000, CBIZ completed the divestiture of three business units that were previously announced in December 1999 (see below) for an aggregate purchase price of $1.2 million, resulting in an additional write-down of $0.6 million.
In December 1999, CBIZ announced the divestiture of four smaller non-core business units. The assets of these businesses were written down to net realizable value (based on estimated sales proceeds), and resulted in an estimated loss of approximately $7.1 million which is included in loss on sale of operations in the accompanying consolidated statements of operations.
In December 1998, CBIZ sold M&N Risk Management, Inc. and M&N Enterprises, Inc. for cash and notes, resulting in a gain of approximately $1.5 million which is included in gain on sale of operations in the accompanying consolidated statements of operations.
14. CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 2000, CBIZ adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognized in Financial Statements." SAB 101 summarizes certain of the Commission's views in applying generally accepted accounting principles to revenue recognition in financial statements. In light of the guidance given by SAB 101 and the SEC's "Frequently Asked Questions and Answers" bulletin released on October 12, 2000, CBIZ changed certain revenue recognition policies effective January 1, 2000.
Due to this change, CBIZ recorded a cumulative adjustment in the first quarter 2000 of $11.9 million (net of tax benefit of $7.9 million). The impact in 2000 of adopting SAB 101 resulted in a reduction in revenue of approximately $18.2 million, a reduction in operating expenses of approximately $11.4 million, and an increase in pretax loss from continuing operations (before cumulative effect of accounting change) of approximately $6.8 million. Prior to the issuance of SAB 101, CBIZ recorded revenue in a manner consistent with generally accepted accounting principles and industry practice. Based upon our review of SAB 101, CBIZ elected to change its revenue recognition policies for the following items.
- Commissions revenue due from insurance carriers from single-premium bank-owned life insurance policies (BOLI) are recorded based on the amounts due at the time of sale, thereby eliminating a substantial portion of commission receivable and resulted in an increase in deferred tax assets. Prior to SAB 101, CBIZ accrued for commission revenue from BOLI products based on the estimated commission to be received over the life of the insurance policy.
- Commission revenue contingent on meeting volume-based bonus levels are recorded at the earlier of notification from the carrier or receipt of payment. Prior to SAB 101, CBIZ accrued for such commission revenue periodically based on the probability of meeting or exceeding the required threshold.
- Revenue related to CBIZ's physician practice management services are recorded once payment is received for our client by the third-party payor, thereby eliminating unbilled receivables and resulted in an increase in deferred tax assets. Prior to SAB 101, CBIZ recognized revenue as services were provided to the client.
- Commission revenue at certain wholesale insurance businesses is reported net of sub-broker commissions, thereby reducing revenue and operating expense proportionately. Prior to SAB 101, commission revenue recognized at these units was reported on a "gross" basis.
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Adoption of the aforementioned revenue recognition policies retroactive to 1999 and 1998 would have produced the following pro forma results (in thousands, except per share amounts):
CBIZ recognized $10.1 million of revenue in 2000 which was included as a component of the cumulative effect of a change in accounting principle.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for fiscal years 2000 and 1999. The sum of the quarterly earnings (loss) per share amounts may not equal the annual amount due to changes in the number of shares outstanding during the year. CBIZ has included the following information below to demonstrate the effect on the first, second and third quarters of fiscal year 2000 as if the provisions of SAB No. 101 (See Note 14, Change in Accounting Principle), had been applied as of the beginning of the fiscal year (in thousands, except per share amounts):
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Certain fourth quarter adjustments were made in 2000 and 1999 that are significant to the quarter and to comparisons between quarters. Presented below are the approximate amounts of adjustments that are the result of fourth quarter events and their effects recorded in the fourth quarter. The following table summarizes certain fourth quarter events discussed below that contributed to CBIZ's net loss reported in the fourth quarter of 2000 and 1999, respectively:
During the fourth quarter of 2000, CBIZ adopted SAB 101 which resulted in a change in accounting policy at certain business units. The change in accounting policy resulted in a $6.3 million and $18.1 million reduction of revenue for the three and twelve-month periods ended December 31, 2000. See note 14 to the consolidated financial statements.
In connection with management's continual evaluation of the recoverability of goodwill and other long-lived assets, management considers in its evaluation, amongst other things, historical and projected operating performance of each business unit. Accordingly, and in connection with our fourth-quarter evaluation, management concluded that the goodwill associated with eleven business units was no longer recoverable through future operations based on a recent deterioration in current and projected operating performance at such units and
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accordingly, an impairment charge of approximately $48.2 million was required to write-down such goodwill to estimated fair value.
During the latter half of 2000, CBIZ experienced significant disruption and management turnover at certain business units, which resulted in a deterioration of our accounts receivable portfolio in the fourth quarter of 2000. As a result, an extensive review was performed of all past due items in the fourth quarter, which resulted in a write-off of approximately $8.8 million of accounts receivable, and an increase in the allowance for doubtful accounts by approximately $7.3 million.
CBIZ recorded a loss on sale of operations of $31.0 million in the fourth quarter of 2000, as compared to $7.1 million for the year ended December 31, 1999. Such charges in 2000 are the result of a) the sale of CBIZ's franchise operations announced on November 2, 2000 at a loss of $3.8 million, and b) the loss related to the planned divestiture of two additional business units to be completed in 2001 of $27.2 million.
Litigation and other asset impairment recorded in the fourth quarter 2000 are primarily comprised of litigation matters that were either settled or reserved for (see Note 7 regarding legal proceedings); asset impairment and write-downs in connection with closing the operations in Toronto, Canada and strategic changes in the business.
During the fourth quarter of 1999, CBIZ's Board of Directors approved a plan to consolidate several of its operations in multi-office markets and integrate certain back-office functions into a shared-services center. The plan includes the consolidation of at least 60 office locations, the elimination of more than 200 positions (including Corporate), and the divestiture of four small, non-core businesses. Pursuant to the plan, CBIZ recorded a consolidation and integration charge of $27.4 million, of which $13.9 million is included in operating expense, $7.1 million is included in loss on sale of operations, and $6.4 million is included in corporate general and administrative expense in the consolidated statements of operations. (See note 16 to the consolidated financial statements).
CBIZ also announced that it would shorten its goodwill amortization period from periods up to 40 years to periods up to 15 years, beginning October 1, 1999. In addition, CBIZ became aware of circumstances which led management to conclude that the collateral (i.e., guarantees from third parties) associated with notes received in connection with a transaction previously accounted for as a discontinued operation in 1997 were impaired, and accordingly, recorded a reserve at December 31, 1999 to adjust such to net realizable value.
16. CONSOLIDATION AND INTEGRATION CHARGES
During the fourth quarter of fiscal 1999, Century's Board of Directors approved a plan to consolidate several operations in multi-office markets and integrate certain back-office functions into a shared-services center. The plan included the consolidation of at least 60 office locations, the elimination of more than 200 positions (including Corporate), and the divestiture of four small, non-core businesses. Pursuant to the plan, Century recorded a consolidation and integration pre-tax charge of $27.4 million, which included $4.8 million for severance and $9.4 million for obligations under various noncancellable leases that were committed to prior to plan approval, for which no economic benefit to Century would be subsequently realized.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidation and integration reserve balances as of December 31, 1999, activity during the twelve-month period ended December 31, 2000, and the remaining reserve balances as of December 31, 2000, were as follows (in thousands):
- ---------------
(1) Amounts adjusted to income are included in operating expense and corporate general and administrative expense in the accompanying consolidated statement of operations for the twelve-month period ended December 31, 2000. See the table below for the respective amounts recorded in each line item.
As a result of executive management changes (including the replacement of Century's President and Chief Operating Officer) and certain strategic changes in the first quarter of fiscal 2000, Century revisited the extent of its planned integration and consolidation initiatives and extended the timing of certain office consolidations beyond one year. Century's Board of Directors approved the revision to the plan on March 31, 2000. Accordingly, Century reduced approximately $4.4 million and $1.4 million of accruals originally provided for in the plan related to the aforementioned noncancellable lease obligations and severance obligations, respectively. During the third quarter of 2000, Century reduced the lease accrual by $1.5 million for the planned consolidation in the Philadelphia market place that has been postponed. Severance amounts of $1.1 million were reversed during the third quarter, representing several business managers originally accrued for in the plan, which were either not terminated or did not receive a severance package.
During 2000, the consolidation of offices in Atlanta, Dallas, Orlando, and Phoenix were completed, with the remaining planned consolidations in progress.
In addition to the consolidation activity described above that relates to the original accrual, CBIZ has incurred expenses related to noncancellable lease obligations related to consolidations in other markets, abandonment of leases, and severance obligations related to these consolidations, as well as expense-reduction initiatives. In the fourth quarter of 2000, expenses were incurred related to the consolidation of two operating units in the Los Angeles market place. Also, CBIZ incurred costs (net of sublease income) related to abandonment of lease space in Philadelphia and Columbia, Maryland.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidation and integration charges incurred for the twelve months ended December 31, 2000, were as follows (in thousands):
17. SEGMENT DISCLOSURES
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," established standards for reporting selected information about operating segments, products and services, geographic areas and major customers.
CBIZ's business units have been aggregated into four reportable segments: business solutions; benefits and insurance; performance consulting and technology solutions services. The business units have been aggregated based on the following factors: the products and services are similar, the services are provided to the same customers, and the long term financial performance of these units is affected by similar economic conditions, in addition to considering the regulatory environment of the insurance segment.
The business solutions segment provides accounting, tax, consulting and business valuation services. The benefits and insurance segment consists of two business units; the benefits and administration group and the insurance services group. The benefits and insurance segment provides benefits administration, business insurance, and payroll services. The performance consulting segment consists of one business unit; the human resources group. The performance consulting segment provides human resources services. The technology solutions segment consists of one business unit; the information technology group. The technology solutions segment provides information technology services. These services are provided to small to medium sized companies in a variety of different industries including, but not limited to, manufacturing, construction, healthcare, and automotive industries.
Corporate and other charges represent costs at the corporate office that are not allocated to the business units, which includes goodwill amortization for all acquisitions accounted for under the purchase method of accounting. Also included in corporate and other are consolidation and integration charges of approximately $21.1 million during 1999. See Note 15 to the consolidated financial statements.
CBIZ operates in the United States and Toronto, Canada and there is no one customer that represents a significant portion of sales.
In November 2000, CBIZ changed its structure from four divisions to three divisions: Business Solutions, Benefits and Insurance, and National Practices. The performance consulting and technology solutions divisions were merged into the National Practices division, and certain business units that formerly reported under Business Solutions and Benefits and Insurance have also been moved to the National Practices division, as these units have a national platform to provide services to customers. CBIZ decided to begin managing the business according to
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
these new divisions effective in November 2000, although the financial reports will not be fully functional until January 1, 2001. Therefore, the segment disclosures below depicts the business under four reportable segments, as previously reported.
Segment information for the years ended December 31, 2000, 1999, and 1998 was as follows (in thousands):
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
18. SUBSEQUENT EVENTS
On March 30, 2001, CBIZ completed an amendment to its original credit facility. The amendment takes into account the fourth quarter 2000 charges incurred as discussed in note 15 to the consolidated financial statements. Significant changes to the amendment are the following:
- The credit facility was reduced from $172 million to $140 million;
- Covenant resets were completed for the minimum consolidated net worth requirement, consolidated leverage ratio and minimum interest coverage ratio;
- A covenant measuring EBITDA versus operating plan was added to the amendment;
- The applicable margin pertaining to interest rates, was increased by 100 basis points at the highest level on the pricing grid; and
- The maturity date was changed from August 2004 to August 2003.
As a result of the amendment, CBIZ was in compliance with all of its debt covenants as of December 31, 2000.
On January 31, 2001, CBIZ completed the sale of Employers Select Plan Agency of Ohio, Inc. for $1.5 million in cash, and St. James General Agency, Inc. for $350,000 in cash. Net proceeds from these sales were used for debt reduction.
On February 26, 2001, CBIZ settled all litigation involving CBIZ E-Solutions, Inc. and Century Business Solutions, Inc. v. Paven R. Bratch, et al. See note 7 to the consolidated financial statements for additional information.
19. DISCONTINUED OPERATIONS
In April 1999, Century adopted a formal plan to divest its risk-bearing specialty insurance segment, which was no longer part of CBIZ's strategic long-term growth objectives. The risk-bearing specialty insurance segment, which included Century Surety Company, Evergreen National Indemnity Company, and Continental Heritage Insurance Company, was reported as a discontinued operation and its net assets and results of operations were reported separately in the consolidated financial statements.
In June 2000, CBIZ announced that it had entered into a binding agreement for the sale of its risk-bearing specialty insurance segment, as well as American Inspection and Audit Services, Inc. and CSC Insurance Agency, Inc. (collectively, the Divested Entities) with Avalon National Corporation (ANC) for $31 million, subject to regulatory approval. In July 2000, ANC assigned its rights under the purchase agreement to Pro
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Finance Holdings Corporation, (which is a consortium of financial entities), and certain former members of CBIZ's management.
In October 2000, CBIZ renegotiated the aforementioned sale agreement with Pro Finance Holding Corporation. In consideration for a $2.0 million reduction in sale proceeds, CBIZ was able to restructure the agreement for tax purposes that provided CBIZ a significant tax benefit. Furthermore, the sale proceeds were reduced by an additional $1.0 million due to severance and bonus payments due at the Divested Entities. Accordingly, in October 2000, CBIZ completed the sale of the Divested Entities for $28 million.
The following information represents the required disclosures for the Divested Entities at December 31, 1999 and 1998, and for the years then ended. Assets and liabilities are included in net assets of discontinued operations in the accompanying consolidated balance sheets, and operating results are included in income (loss) from operations of discontinued business in the accompanying consolidated statements of operations.
At December 31, 1999, the net assets of discontinued operations for the specialty insurance segment consisted primarily of the following (in thousands):
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Operating results of the discontinued segment were as follows (in thousands):
INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to maturity at December 31, 1999 were as follows (in thousands):
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The amortized cost and estimated fair value of securities available for sale at December 31, 1999 were as follows (in thousands):
Expected maturities will differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and estimated fair value of fixed maturities held to maturity at December 31, 1999, by contractual maturity, were as follows (in thousands):
The amortized cost and estimated fair value of fixed maturities available for sale at December 31, 1999, by contractual maturity, were as follows (in thousands):
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Net investment income was as follows (in thousands):
Realized gains and losses on investments were are as follows (in thousands):
The change in net unrealized appreciation (depreciation) of investments is summarized as follows (in thousands):
The components of unrealized appreciation (depreciation) on securities available for sale at December 31, 1999 and 1998 were as follows (in thousands):
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As a result of the adoption of SFAS 130 in 1998, reclassification adjustments related to gains on securities available for sale at December 31, 1999 and 1998 were as follows (in thousands):
Fixed maturities held to maturity and certificates of deposit with a carrying value of approximately $10,172,000 at December 31, 1999, were on deposit with regulatory authorities as required by law.
The following methods and assumptions were used by CBIZ in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments and premiums receivable: The carrying amounts reported in the consolidated 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.
Mortgage loans: The carrying amounts reported in the consolidated balance sheets are the aggregate unpaid balances of the loans, which approximates fair value.
DEFERRED POLICY ACQUISITION COSTS
At December 31, 1999 and 1998 changes in deferred policy acquisition costs were as follows (in thousands):
REINSURANCE
In the ordinary course of business, CBIZ assumed and ceded reinsurance with other insurers and reinsurers. These arrangements provide CBIZ with a greater diversification of business and generally limit the maximum net loss potential on large risks. Although the ceding of reinsurance did not discharge an insurer from its primary legal liability to a policyholder, the reinsuring company assumes the related liability. Excess of loss reinsurance contracts in effect through December 31, 1999 generally protected individual property losses over $200,000 and casualty losses over $200,000. Additionally, most contract surety business was reinsured on a 92.5% quota share basis of the first $500,000 in losses. Workers compensation business was 100% ceded on a quota share basis to reinsurers. Catastrophe coverage is also maintained.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The impact of reinsurance were as follows (in thousands):
The reinsurance payables were $16,766,500 at December 31, 1999.
Reinsurance recoverables were comprised of the following as of December 31, 1999 and 1998 (in thousands):
CBIZ evaluated the financial condition of its reinsurers and established a valuation allowance as reinsurance receivables were deemed uncollectible. During 1999, the majority of ceded amounts were ceded to General Insurance Company, Continental Casualty Company, Republic Western Insurance Company, American Reinsurance Company, Signet Star Reinsurance Company, and Underwriters Reinsurance Company. Century monitored concentrations of risks arising from similar geographic regions or activities to minimize its exposure to significant losses from catastrophic events.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
LIABILITY FOR LOSSES AND LOSS EXPENSE PAYABLE
Activity in the liability for unpaid losses and loss expenses is summarized as follows (in thousands):
CBIZ experienced higher than anticipated ultimate losses on prior year. CBIZ's environmental exposure from continuing operations related primarily to its coverage of remediation related risks, thus management believes CBIZ's exposure to historic pollution situations is minimal.
Ohio law limits the payment of dividends by an insurance company to its parent. The maximum dividend that may be paid without prior approval of the Director of Insurance is limited to the greater of the statutory net income of the preceding calendar year or 10% of total statutory surplus as of the prior December 31.
The consolidated financial statements were prepared in accordance with generally accepted accounting principles (GAAP). CBIZ's insurance subsidiaries filed annual financial statements with the Ohio 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 included 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 Century'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, states where certain subsidiaries of Century are domiciled. The RBC formula includes components for asset risk, liability risk, interest rate exposure and other factors. Century's insurance subsidiaries exceeded all required RBC levels as of December 31, 1999.
The CSC Group's statutory net income for the years ended December 31, 1999 and 1998, was approximately $554,000 and $4,889,000, respectively. The statutory capital and surplus as of December 31, 1999 was approximately $29,512,000.
CENTURY BUSINESS SERVICES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS)
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SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
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SCHEDULE IV -- REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)