SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001 or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from to .
COMMISSION FILE NUMBER 0-25890
CENTURY BUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
-------------------------------------------- --------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6480 ROCKSIDE WOODS BOULEVARD, SOUTH,
SUITE 330
CLEVELAND, OHIO 44131
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 447-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Name of Each Exchange on Which Registered:
The Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is approximately $310.4 MILLION as of March 25, 2002. The number
of outstanding shares of the Registrant's common stock is 95,513,623 shares as
of March 25, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative
to the 2002 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration statements.
CENTURY BUSINESS SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I
Items 1 and 2. Business and Properties..................................... 3
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7A. Quantitative and Qualitative Information About Market
Risk........................................................ 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
Item 13. Certain Relationships and Related Transactions.............. 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 32
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THE FOLLOWING TEXT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS ANNUAL REPORT TO "WE", "OUR",
"CBIZ", OR THE "COMPANY" SHALL MEAN CENTURY BUSINESS SERVICES, INC., A DELAWARE
CORPORATION, AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
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 in Toronto,
Canada. CBIZ delivers integrated services through the following three divisions:
- Business Solutions;
- Benefits and Insurance; and
- National Practices.
CBIZ provides services through 76 business units with more than 200 offices
located in 33 states, Washington D.C., and Toronto, Canada. Included in this
total is the Company's physician management practice business unit which has 61
offices.
Formed as a Delaware corporation in 1987 under the name Stout Associates,
CBIZ was acquired by Republic Industries, Inc. in 1992. In April 1995, Republic
spun-off its hazardous waste operations, including CBIZ's predecessor company,
to stockholders. Re-named Republic Environmental Systems, Inc., CBIZ's common
stock began trading on the Nasdaq National Market under the symbol "RESI" until
June 24, 1996. On that date, the trading symbol changed to "IASI" in
anticipation of our merger with Century Surety Company and Commercial Surety
Agency, Inc., which resulted in a change of its name to "International Alliance
Services, Inc." This name change signaled our move away from the hazardous waste
business. CBIZ divested all remaining hazardous waste operations in 1997. On
December 23, 1997, CBIZ changed its name to Century Business Services, Inc. and
began trading under the symbol "CBIZ."
CBIZ initiated an acquisition program in November 1996 to expand its
operations in the professional outsourced business services industry. Since that
time, CBIZ has acquired the businesses of 145 companies, one of which was
acquired in 2001. Through its subsidiaries, CBIZ provides a wide range of
integrated services primarily to small and medium-sized businesses, as well as
individuals, governmental entities and not-for-profit enterprises throughout the
United States and in Toronto, Canada. CBIZ's goal is to be a leading provider of
outsourced business services within its target markets. CBIZ's strategies to
achieve this goal include:
- providing clients with a broad range of high-quality products and
services;
- expanding locally through internal growth by:
- increasing the number of clients it serves;
- increasing the number of services it provides to existing clients; and
- from time to time, completing acquisitions to expand its service
offerings in a target market.
CBIZ'S PRINCIPAL EXECUTIVE OFFICE IS LOCATED AT 6480 ROCKSIDE WOODS BLVD.,
SOUTH, SUITE 330, CLEVELAND, OHIO 44131 AND ITS TELEPHONE NUMBER IS
216-447-9000.
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BUSINESS STRATEGY
CBIZ's business strategy is to grow in the professional outsourced business
services industry by:
- offering a wide array of infrastructure support services;
- cross-serving CBIZ's business services to its existing customer base;
- attracting new customers with its diverse business services offerings;
- realizing economies of scale to leverage its purchasing power from
national vendors and leverage practice-area expertise across all business
units; and
- developing our core service offerings in target markets through selective
acquisitions from time to time.
Providing a range of outsourced business services to a client results in
efficiencies for both the client and for CBIZ. For example, CBIZ can process
time and attendance data to calculate and produce employee paychecks, direct
deposits and reports for its clients. The same data can be used by CBIZ as a
group health and welfare insurance agent and benefits consultant to provide the
most appropriate benefits package to a client's employee base. The ability to
combine several services and offer them through one provider is more convenient
for the client and distinguishes CBIZ from most other outsourced business
services providers.
CBIZ also may from time to time make acquisitions in markets where it
currently operates and where the prospects are favorable to increase its market
share to become a significant provider of a comprehensive range of outsourced
business services. CBIZ's strategy is to acquire companies that generally:
- have a strong potential for cross-serving among CBIZ's subsidiaries;
- have strong and energetic leadership;
- have historic and expected future internal growth; and
- complete the core CBIZ service offering in a geographical market.
In accordance with its strategy to deliver services to clients
conveniently, and to promote cross-serving between its various service groups,
CBIZ consolidates office locations wherever practical. In late 2000 and in 2001,
CBIZ consolidated offices in Atlanta, Chicago, Cleveland, Columbus, Dallas, Los
Angeles, and Orlando, and will continue to combine offices, with further
consolidations planned for Minneapolis, Philadelphia, St. Louis, San Diego, and
San Jose in 2002 and Denver and Kansas City in 2003. As further consolidations
occur, it is likely the Company will incur restructuring costs associated with
these consolidations.
OUTSOURCED BUSINESS SERVICES
The following is a description of the outsourced business services
currently offered by CBIZ.
Business Solutions. The business units that comprise CBIZ's Business
Solutions division offer services in the following areas: tax planning and
preparation; cash flow management; strategic planning; consulting; record-
keeping; federal, state and local tax return preparation; tax planning based on
financial and investment alternatives; tax structuring of business transactions
such as mergers and acquisitions; quarterly and year-end payroll tax reporting;
corporate, partnership and fiduciary tax planning and return preparation;
outsourced chief financial officer services and other financial staff services;
financial investment analysis, succession, retirement, and estate planning; and
profitability, operational and efficiency enhancement consulting to a number of
specialized industries. Other than internal audit services, CBIZ does not
currently offer audit and attest services, does not intend to offer audit and
attest services in the future and does not purchase the "audit and attest
divisions" of any accounting businesses it acquires. However, CBIZ and its
subsidiaries maintain joint-referral relationships and service agreements with
licensed Certified Public Accounting or CPA firms under which audit and attest
services may be provided to CBIZ's clients and vice versa.
Under these service agreements with licensed CPA firms, CBIZ subsidiaries
provide administrative services, including office, bookkeeping, accounting and
other administrative services; prepare marketing and promotion materials; and
lease administrative and professional staff, in exchange for a fee. The CPA
firms with which CBIZ
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and its subsidiaries maintain such agreements are those that have reorganized in
order to merge their non-attest (non-attest business services include any
services other than those which only licensed certified public accountants,
licensed public accountants, or licensed CPA or PA firms may perform in
accordance with accountancy laws) business services activities with and into
CBIZ subsidiaries. Under these agreements, each party has agreed to maintain its
own liability and risk of loss in connection with performance of its respective
services. CBIZ currently undergoes an annual peer review administered to ensure
compliance with independence requirements in its relationships with associated
CPA firms and clients. The peer review has found CBIZ in compliance with these
rules every year since the review was first administered.
The Company's Business Solutions division is made up of four groups,
representing the East, Midwest, Great Lakes, and West regions of the country.
Each of these regions is headed by a designated regional director, all of whom
report to the Senior Vice President, Business Solutions. While all of the
business units in the Business Solutions group can offer most of the core
accounting, tax and consulting services clients need, CBIZ operates various
practice groups within this division with a deeper expertise in certain areas,
which business units across the country can utilize as a resource. These include
a national tax office, which provides guidance on complex tax issues; a recovery
solutions office, which assists clients nationwide in realizing lost monies by
examining and rectifying inaccurate accounts payable; and a restructuring and
bankruptcy group, which specializes in assisting firms undergoing financial
difficulties.
The Business Solutions division contributed approximately 44% of CBIZ's
annual revenue in 2001.
Benefits and Insurance Services. The business units that comprise CBIZ's
Benefits and Insurance division offer services in the following areas: employee
benefits, insurance brokerage, consulting, and administration, including the
design, implementation and administration of qualified plans, such as 401(k)
plans, profit-sharing plans, defined benefit plans, and money purchase plans;
actuarial services; health and welfare benefits consulting, including group
health insurance plans; dental and vision care programs; group life insurance
programs; accidental death and dismemberment and disability programs; COBRA
administration and voluntary insurance programs; health care and dependent care
spending accounts; premium reimbursement plans; communications services to
inform and educate employees about their benefit programs; executive benefits
consulting on non-qualified retirement plans and business continuation plans;
specialty high-risk life insurance; employee benefit worksite marketing; and
wealth management services, including Registered Investment Advisory Services,
Investment Policy Statements, also known as IPS, mutual fund selection based on
IPS and ongoing mutual fund monitoring. CBIZ's Benefits and Insurance group also
provides an on-line service, CBIZSolutions.com, that enables clients' employees
to access benefits information such as retirement funds and payroll balances,
update their personal information, and access company documents like employee
handbooks.
CBIZ's Benefits and Insurance Services division operates under one Senior
Vice President, who oversees three regional divisions and their respective
directors, representing the Eastern, Central, and Western states. Additionally,
CBIZ operates wholesale insurance and other specialty insurance divisions, which
also report directly to CBIZ's Senior Vice President of Benefits and Insurance
Services.
The Benefits and Insurance division contributed approximately 28% of CBIZ's
annual revenue in 2001.
National Practices. The business units that comprise CBIZ's National
Practices division offer services in the following areas: payroll processing and
administration; valuations of commercial, tangible, and intangible assets and
financial securities; mergers and acquisitions and capital advisory services;
physician practice management; health care consulting; government relations;
process improvement; and technology consulting, including strategic technology
planning, project management, development, network design and implementation and
software selection and implementation. Changes in accounting methods dictated by
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 142 (SFAS 142), which will take effect in 2002, will require new
valuation techniques in accounting for intangible assets. These changes are
expected to increase demand for CBIZ's valuation services. Additionally, CBIZ's
payroll division recently adopted a new payroll system utilizing improved
database technology which offers clients a single point of data entry for
multiple uses for benefits, human resources and payroll functions.
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The business units within the group report to CBIZ's President and Chief
Operating Officer. CBIZ's physician practice management subsidiary, a National
Practice business unit which oversees billing and records compliance for medical
professionals, generated approximately 23% of the divisions's revenue, or 7% of
CBIZ's annual revenue in 2001.
The National Practices division contributed approximately 28% of CBIZ's
annual revenue in 2001.
SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
CBIZ's key competitive factors in obtaining clients for business services
are:
- established relationships;
- strong regional presence;
- the ability to match client requirements with available services;
- the ability to offer a number of services from one provider; and
- the ability to offer services at competitive rates.
CBIZ believes that by combining a local entrepreneurial marketing strategy
and the name and resources of a nationally branded company, it will be able to
maximize its market penetration. CBIZ expects that it can take advantage of
economies of scale in purchasing a range of services and products and
cross-serving new products and services to existing clients who do not currently
utilize all of the services CBIZ offers.
CBIZ's primary marketing strategy is to deepen its relationships with
clients by providing them with additional CBIZ services that would be in the
best interest of their business. CBIZ refers to this strategy of penetrating its
existing client base as cross-serving. Because cross-serving is only effective
when it makes outsourcing more convenient for the client, the location of the
service provider is a key consideration, and requires marketing functions to be
carried out on a geographic basis. Using major metropolitan areas as its
marketing focal points, CBIZ is developing marketing plans that consider the
needs of all CBIZ business units in an area. While each business unit continues
to be individually responsible for creating its own marketing plan and is
accountable for its own performance, a number of marketing resources are shared
via the Company's intranet. These resources include intellectual capital,
advertisements, printed material such as brochures and stationery, and
CBIZ-branded merchandise for trade shows and other client-oriented events. New
clients are generated via networking, referrals from existing clients, and
participation in trade shows.
The Company expanded its marketing capabilities in October 2001 by entering
into an agreement with HarborView Partners, a Stamford, Connecticut-based
provider of internal audit and business advisory services. Under the terms of
the agreement between the two companies, CBIZ will be the exclusive provider of
professional staff to HarborView Partners to conduct internal audits for
engagements that HarborView Partners secures within the United States. This
agreement was entered into to take advantage of the SEC's auditor independence
rules, effective in August 2002, which will limit the amount of internal audit
services a company may place with their independent auditor, and thus require
the redistribution of internal auditing work to either in-house personnel or
other outside providers.
ACQUISITIONS
In May 2001, CBIZ acquired one business that was accounted for under the
purchase method of accounting. The aggregate purchase price of the acquisition
was approximately $300,000 in cash. The aggregate purchase price has been
allocated to the net assets of the acquired company based upon its respective
fair market value. The excess of the purchase price over fair value of net
assets acquired (goodwill) approximated $100,000. Due to the nature of the
assets and liabilities of the business acquired, there were no material
identifiable intangible assets or liabilities. This acquisition was executed in
order to increase CBIZ's web hosting capacity.
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DIVESTITURES
In 2001, CBIZ divested, consolidated or closed 20 operating entities in
order to rationalize its business operations by shedding business units that are
either underperforming, located in secondary markets, or do not provide the
level of synergistic cross-serving opportunities with other CBIZ businesses that
is desired. These divestitures are consistent with the Company's plan to focus
on metropolitan markets in which it currently has or can easily gain a full
array of its core service offerings. It is likely the Company will recognize
additional gains and/or losses on these divestitures as they occur in the
future.
COMPETITION
The professional outsourced business services industry is a highly
fragmented and competitive industry, with a majority of industry participants,
such as accounting, employee benefits, payroll firms or professional employee
organizations, offering only one or a limited number of services. Competition is
based primarily on customer relationships, range and quality of services or
product offerings, customer service, timeliness, geographic proximity, and
competitive rates. CBIZ competes with a small number of multi-location regional
or national operators and a large number of relatively small independent
operators in local markets. CBIZ's competitors in the professional outsourced
business services industry include independent consulting services companies,
divisions of diversified enterprises, insurance carriers and banks. Some of
these competitors are public companies and some may have greater financial
resources than CBIZ.
CBIZ believes that it is able to compete effectively based on its:
- broad range of high-quality services and products;
- knowledgeable and trained personnel;
- entrepreneurial culture;
- large number of locations;
- focused target on small and mid-market businesses; and
- operational economies of scale.
CUSTOMERS
CBIZ provides professional outsourced business services to over 65,000
clients. CBIZ's clients typically have fewer than 500 employees and prefer to
focus their resources on operational competencies while outsourcing non-core
administrative functions to CBIZ. In many instances, outsourcing administrative
functions allows clients to enhance productivity, reduce costs and improve
service, quality and efficiency by focusing on the client's core business.
Depending on a client's size and capabilities, it may choose to utilize some or
many of CBIZ's broad array of services, which it typically accesses through a
single CBIZ representative.
None of CBIZ's major business services groups has a single homogeneous
client base. Rather, CBIZ's clients come from a large variety of industries and
markets, and, with the exception of one customer which contributes approximately
3.1% of the Company's revenue, no one customer individually comprises more than
3% of CBIZ's total consolidated revenue. Management believes that such diversity
helps insulate CBIZ from a downturn in a particular industry. In addition,
CBIZ's clients value the quality of services and established relationships.
Nevertheless, economic conditions among selected clients and groups of clients
may have an impact on the demand for such services.
REGULATION
CBIZ's operations are subject to regulations by federal, state, and local
governing bodies. Accordingly, our outsourced business services may be impacted
by legislative changes by these bodies, particularly with respect to provisions
relating to payroll, benefits administration and insurance services, pension
plan administration, tax and accounting. CBIZ remains abreast of regulatory
changes affecting its business, as these changes often affect clients'
procedures with respect to employment, taxation, benefits, and accounting. For
instance, changes in
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income, estate, or property tax laws may require additional consultation with
clients subject to these changes to ensure their procedures comply with revised
regulations.
CBIZ itself is subject to industry regulation and changes within it,
including changes in laws, regulations, and codes of ethics governing the
accounting industry, the interpretation of which may restrict CBIZ's operations.
Accordingly, CBIZ's ability to continue to operate in, or expand its operations
in or to, some states may depend on its flexibility to modify its operational
structure in response to these changes.
LIABILITY INSURANCE
CBIZ carries commercial general liability, automobile liability,
professional liability, directors and officers liability, fiduciary liability,
employment practices liability and workers' compensation subject to prescribed
state mandates. Excess liability is carried over the underlying limits provided
by the commercial general liability and automobile liability policies.
EMPLOYEES
At December 31, 2001, CBIZ employed approximately 4,900 employees,
approximately half of whom are professionals. The Company believes that it has a
good relationship with its employees. CBIZ realizes that as a professional
services company that differentiates itself from competitors through the quality
and diversity of its service offering, the Company's employees are its most
important asset. Accordingly, CBIZ strives to remain competitive as an employer
while increasing the capabilities and performance of its employees. In 2001, the
Company commenced an employee stock purchase program and began to offer
continuing professional education (CPE) credit opportunities on-line to its
employees. Additionally, in 2001 CBIZ standardized its benefit programs and
revised its incentive compensation plan to recognize and reward performance that
is in line with the Company's strategic goals.
SEASONALITY
A disproportionately large amount of CBIZ's revenue occurs in the first
half of the year. This is due primarily to the Company's accounting and tax
practice, which is subject to seasonality related to the heavy volume in the
first four months of the year. CBIZ estimates that its Business Solutions group
generates approximately 35% of its revenue in the first quarter of the year.
Like most professional service companies, most of CBIZ's operating costs are
fixed, resulting in much higher operating margins in the first half of the year.
PROPERTIES
CBIZ's corporate headquarters are located at 6480 Rockside Woods Blvd.,
South, Suite 330, Cleveland, Ohio 44131, in leased premises. Some of CBIZ's
property and equipment are subject to liens securing payment of indebtedness of
CBIZ and its subsidiaries. CBIZ and its subsidiaries lease more than 200 offices
in 33 states and one in Toronto, Canada, as well as office equipment and company
vehicles. As CBIZ continues to consolidate and rationalize its operations, it
expects to reduce the number of leases it currently holds. CBIZ believes that
its facilities are sufficient for its needs.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Annual Report, including without limitation, "Business and
Properties" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding CBIZ's financial position, business strategy
and plans and objectives for future performance are forward-looking statements.
You can identify these statements by the fact that they do not relate strictly
to historical or current facts. Forward-looking statements are commonly
identified by the use of such terms and phrases as "intends," "believes,"
"estimates," "expects," "projects," "anticipates," "foreseeable future,"
"seeks," and words or phases of similar import in connection with any discussion
of future operating or financial performance. In particular, these include
statements relating to future actions, future performance or results of
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current and anticipated services, sales efforts, expenses, and financial
results. From time to time, we also may provide oral or written forward-looking
statements in other materials we release to the public. Any or all of our
forward-looking statements in this 10-K, in the 2001 Annual Report and in any
other public statements that we make, may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion above will be
important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. Also note that we provide
the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses. These are factors that we
think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect operating or financial performance. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
RISK FACTORS
The following factors may affect our actual operating and financial results
and could cause results to differ materially from those in any forward-looking
statements. There may be other factors, and new risk factors may emerge in the
future. You should carefully consider the following information.
WE ARE DEPENDENT ON THE CURRENT TREND OF OUTSOURCING BUSINESS SERVICES.
Our business and growth depend in large part on the trend toward
outsourcing business services. We can give you no assurance that this trend in
outsourcing will continue. Current and potential customers may elect to perform
such services with their own employees. A significant reversal of, or a decline
in, this trend would have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE MORE SENSITIVE TO REVENUE FLUCTUATIONS THAN OTHER COMPANIES, WHICH
COULD RESULT IN FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK.
A substantial majority of our operating expenses, particularly personnel
and related costs, depreciation and rent, are relatively fixed in the short run.
As a result, we may not be able to quickly cut costs in response to any decrease
in revenue. For example, any decision by a client to delay or cancel our
services may cause significant variations in operating results and could result
in losses for the applicable quarters. Additionally, the general condition of
the United States economy, and the current weakness in the economy, has and will
continue to affect our business. Potential new clients may defer from switching
service providers in light of these economic conditions. Any of these factors
could cause our quarterly results to be lower than expectations of securities
analysts, which could result in a decline in the price of our common stock.
WE MAY NOT REALIZE THE VALUE OF OUR GOODWILL.
Acquisitions have resulted in significant amounts of goodwill on our
financial statements. Goodwill is the excess of the purchase price over the fair
value of the net identifiable assets of the businesses that we have acquired. We
anticipate that such increases will continue if we make future acquisitions. At
December 31, 2001, goodwill was $247.5 million. During the fourth quarter of
2001, CBIZ divested operations which resulted in a reduction of its goodwill by
$13.8 million. We may not realize the full value of our remaining goodwill, and
further adjustments are possible. The implementation of SFAS 142, "Goodwill and
Other Intangible Assets," in 2002 requires the determination of fair value of
goodwill and subsequent evaluation of its fair value against its book value.
This test may result in impairment and reduction of the Company's goodwill. Any
future determination requiring a reduction of a significant portion of goodwill
could have a material adverse effect on our business, financial condition and
results of operations, compliance with our debt covenants and on the market
price of our stock.
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WE HAVE A RISK THAT PAYMENTS ON ACCOUNTS RECEIVABLE OR NOTES RECEIVABLE MAY BE
SLOWER THAN EXPECTED, OR THAT AMOUNTS DUE ON RECEIVABLES OR NOTES MAY NOT BE
FULLY COLLECTIBLE.
Professional services firms often experience higher average accounts
receivable days outstanding compared to many other industries. If collections
become slower, our liquidity may be adversely impacted. We monitor the aging of
receivables regularly and make assessments of the ability of customers to pay
amounts due. We accrue for potential bad debts each month and recognize
additional reserves against bad debts as we deem it appropriate. Notwithstanding
these measures, our customers may face unexpected circumstances that adversely
impact their ability to pay their trade receivables or note obligations to us
and we may face unexpected losses as a result.
WE ARE DEPENDENT ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY
EMPLOYEES.
Our success depends in large part upon the abilities and continued services
of our executive officers and other key employees, such as our business unit
leaders. In the course of business operations, employees may resign and seek
employment elsewhere. Certain principal employees, however, are bound in writing
to non-compete agreements barring competitive employment, client solicitation,
and solicitation of employees for a period of between two and ten years
following his or her resignation. We cannot assure you that we will be able to
retain the services of our key personnel. If we cannot retain the services of
key personnel, there could be a material adverse effect on our business,
financial condition and results of operations. While we generally have
employment agreements and non-compete agreements with key personnel, courts are
at times reluctant to enforce such non-compete agreements. In addition, many of
our executive officers and other key personnel are either participants in our
stock option plan or holders of a significant amount of our common stock. We
believe that these interests provide additional incentives for these key
employees to remain with us. In order to support our growth, we will need to
effectively recruit, hire, train and retain additional qualified management
personnel. Our inability to attract and retain necessary personnel could have a
material adverse effect on our business, financial condition and results of
operation.
RESTRICTIONS IMPOSED BY INDEPENDENCE REQUIREMENTS AND CONFLICT OF INTEREST
RULES MAY LIMIT THE CLIENTS WE SERVICE AND THE ABILITY OF THE ATTEST FIRMS
WITH WHICH WE HAVE CONTRACTUAL RELATIONSHIPS TO PROVIDE ATTESTATION SERVICES.
We have entered into administrative services agreements with separate
attest firms owned by the CPA owners of each professional services firm under
which we provide professional staffing and other services. Revenues and income
from these agreements are reflected in our financial statements.
With respect to attest firm clients that are required to file audited
financial statements with the Securities and Exchange Commission, or SEC, the
SEC staff views us and the attest firms with which we have contractual
relationships as a single entity in applying independence rules established by
the accountancy regulators and the SEC. According to the SEC staff, we are
required to abide by all of the independence rules that the attest firms must
follow in order to be independent of an SEC-reporting attest client. According
to the SEC staff, these independence rules prohibit us, and our officers,
directors, affiliates and significant stockholders, to the extent an attest firm
is so prohibited, from:
- holding any financial interest in an SEC-reporting attest client;
- entering into any business relationship with an SEC-reporting attest
client; or
- selling any services to an SEC-reporting attest client.
In addition, under these rules, the SEC staff views an attest firm and us
as lacking independence with respect to:
- an SEC-reporting attest client where that client, or its directors,
officers, affiliates or significant stockholders, own stock in us or our
affiliates; or
- entities involved in an offering of our stock or in making a market for,
or otherwise facilitating the trading of, our stock in the secondary
market, including any entity that is a member of a syndicate underwriting
an offering of our stock, that is a broker-dealer exercising
discretionary buy and sell authority over
10
customer accounts holding significant positions in our stock, or that
employs securities analysts that follow us.
We remain in contact with state accountancy regulators in jurisdictions in
which we operate to ensure our business services model complies with
independence regulations. To date, no state accountancy regulatory authority has
prohibited our operations in any jurisdiction. In addition, we and the attest
firms have implemented policies and procedures designed to enable us to maintain
independence and freedom from conflicts of interest in accordance with
applicable standards. These procedures include independence screening in
connection with the selection of attest clients as well as periodic
confirmations of independence by officers, directors and professionals of us and
the attest firms.
There can be no assurance that following the policies and procedures
implemented by us and the attest firms will enable us and the attest firms to
avoid circumstances that would cause us and them to lack independence from an
SEC-reporting attest client. If, as a result of the independence rules, we or
the attest firms are required to discontinue attestation or other services for
existing or potential future clients, then our revenues could decline. To date,
revenues derived from providing services in connection with attestation
engagements of the attest firms performed for SEC-reporting clients have not
been material.
GOVERNMENTAL REGULATIONS AND INTERPRETATIONS ARE SUBJECT TO CHANGES.
Laws and regulations often result in changes in the amount or the type of
business services required by businesses and individuals. We cannot be sure that
future laws and regulations will provide the same or similar opportunities for
us to provide business consulting and management services to businesses and
individuals. In response to recent auditing problems experienced by several
publicly traded companies, the SEC is currently contemplating a number of rule
changes that would affect the accounting profession. While it appears that most
of these possible changes pertain to the auditing of publicly traded companies,
a line of business we do not offer, there is a chance that modifications of the
law could adversely impact our business by reducing or eliminating our ability
to provide consulting services to the clients audited by our associated attest
firms. To the extent that licensed CPA firms for whom our subsidiaries provide
administrative and other services are affected, we may experience a decline in
fee revenue from these businesses as well. The revenue derived from public
companies for whom these associated attest firms perform auditing services is
nominal.
ANY FAILURE TO MEET OUR DEBT OBLIGATIONS OR DEBT COVENANTS COULD HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
If our cash flow and capital resources are insufficient to fund our debt
obligations, we may be forced to sell assets, seek additional equity or debt
capital or restructure our debt. In addition, any failure to make scheduled
payments of interest and principal on our outstanding indebtedness or to remain
in compliance with our debt covenants would likely result in a reduction of our
credit rating, which could harm our ability to obtain additional financing on
acceptable terms. In the past, CBIZ has, from time to time, been in violation of
certain debt covenants. In each case, we have successfully negotiated waivers
and/or amendments to the covenants to re-establish compliance. However, we
cannot assure you that we will be similarly successful if we are in violation of
debt covenants in the future; nor can we assure you that our cash flow and
capital resources will be sufficient for payment of interest and principal of
our debt in the future, or that any such alternative measures would be
successful or would permit us to meet scheduled debt service obligations.
WE ARE SUBJECT TO RISK AS IT RELATES TO PROCESSING CUSTOMER TRANSACTIONS FOR
OUR 401(K), PAYROLL, PROPERTY TAX MANAGEMENT, AND CERTAIN OTHER TRANSACTION
PROCESSING BUSINESSES.
The high volume of client funds processed by us in our 401(k), payroll, and
certain other businesses entails risks for which we may be held liable if the
accuracy or timeliness of the transactions processed is not correct. We could
incur significant legal expense to defend any claims against us, even those
claims without merit. While we carry insurance against these potential
liabilities, we cannot be certain that circumstances surrounding such an error
would be entirely reimbursed through insurance coverage.
11
WE ARE SUBJECT TO RISK AS IT RELATES TO SOFTWARE THAT WE LICENSE FROM THIRD
PARTIES.
We license software from third parties, much of which is integral to our
systems and our business. The licenses are terminable if we breach our
obligations under the license agreements. If any of these relationships were
terminated or if any of these parties were to cease doing business or cease to
support the applications we currently utilize, we may be forced to spend
significant time and money to replace the licensed software. However, we cannot
assure you that the necessary replacements will be available on reasonable
terms, if at all.
WE COULD BE HELD LIABLE FOR ERRORS AND OMISSIONS.
All of our professional business services entail an inherent risk of
professional malpractice and other similar claims. Therefore, we maintain errors
and omissions insurance coverage. Although we believe that our insurance
coverage is adequate, we cannot be certain that actual future claims or related
legal expenses would not exceed the coverage amounts. If we have a large claim
on our insurance, the rates for such insurance may increase, but contractual
arrangements with clients may constrain our ability to incorporate such
increases into service fees. Such insurance rate increases, as well as any
underlying malpractice claim, could have a material adverse effect on our
business, financial condition and results of operations.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER OUR OPERATIONS.
As of March 25, 2002, the following groups owned the following aggregate
amounts and percentages of our common stock, including shares that may be
acquired by exercising options or warrants:
- approximately 14,613,138 shares, representing 15.30% of all our
outstanding common stock, were owned by Mr. DeGroote, our Chairman;
- approximately 5,422,222 shares, representing 5.68% of all our outstanding
common stock, were owned by Mr. Huizenga, a principal stockholder; and
- approximately 22,253,099 shares, representing 23.30% of all our
outstanding common stock, were owned by our executive officers,
directors, and Mr. Huizenga, as a group.
Because of their stock ownership, these persons can substantially influence
actions that require the consent of a majority of our outstanding shares,
including the election of directors.
WE HAVE SHARES ELIGIBLE FOR FUTURE SALE THAT COULD ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK.
Future sales or issuances of common stock, or the perception that sales
could occur, could adversely affect the market price of our common stock and
dilute the percentage ownership held by our stockholders. We have authorized 250
million shares, and have issued and outstanding approximately 95 million shares.
More than 47 million of these shares have been issued in connection with
acquisitions. As part of many acquisition transactions, the shares were
contractually restricted from sale for periods up to two years, most of which
expired by the end of 2001. By March 25, 2002, no shares of common stock were
still under lock-up contractual restrictions. We cannot be sure when sales by
holders of our stock will occur, how many shares will be sold or the effect that
sales may have on the market price of our common stock. As of March 25, 2002, we
also have registered under the Securities Act the following shares of common
stock for the following purposes:
- $125 million in shares of our common stock, debt securities, and warrants
to purchase common stock or debt securities, of which $100 million remain
available to be offered from time to time by us to the public under our
universal shelf registration statement;
- 15,000,000 shares of our common stock, all of which remain available to
be offered from time to time by us in connection with acquisitions under
our acquisition shelf registration statement; and
- Approximately six million shares of our common stock, part of a shelf
registration statement, of which a majority have yet to be sold
thereunder.
12
WE ARE RELIANT ON INFORMATION PROCESSING SYSTEMS.
Our ability to provide outsourced business services depends on our capacity
to store, retrieve, process and manage significant databases and expand and
upgrade periodically our information processing capabilities. Interruption or
loss of our information processing capabilities through loss of stored data,
breakdown or malfunctioning of computer equipment and software systems,
telecommunications failure, or damage caused by fire, tornadoes, lightning,
electrical power outage, or other disruption could have a material adverse
effect on our business, financial condition and results of operations. Although
we have disaster recovery procedures in place and insurance to protect against
such contingencies, we cannot be sure that insurance or these services will
continue to be available at reasonable prices, cover all our losses or
compensate us for the possible loss of clients occurring during any period that
we are unable to provide outsourced business services.
WE MAY NOT BE ABLE TO ACQUIRE AND FINANCE ADDITIONAL BUSINESSES.
We completed a significant number of acquisitions from 1996 through 1999.
While we have significantly slowed our strategic acquisition program, we would
like to continue to grow through acquisitions of complementary businesses to
build out our service offerings in our target markets. However, we cannot be
certain that we will be able to continue identifying appropriate acquisition
candidates and acquire them on satisfactory terms. We cannot assure you that
such acquisitions, even if obtained, will perform as expected or will contribute
significant revenues or profits. In addition, we may also face increased
competition for acquisition opportunities, which may inhibit our ability to
complete transactions on terms that are favorable to us. Management believes
that funds available under the credit facility, along with cash generated from
operations, will be sufficient to meet its liquidity needs in the foreseeable
future; however, there are certain restrictions under our bank line of credit
that may prohibit our ability to acquire additional businesses.
THE OUTSOURCING INDUSTRY IS COMPETITIVE AND FRAGMENTED.
We face competition from a number of sources in both the outsourced
business services industry and from specialty insurance agencies. Competition in
both industries has led to consolidation of many large companies that may have
greater financial, technical, marketing and other resources than us. In addition
to these new large companies, we face competition in the outsourced business
services industry from in-house employee services departments, local outsourcing
companies and independent consultants, as well as from new entrants into our
markets. We cannot assure you that, as our industry continues to evolve,
additional competitors will not enter the industry or that our clients will not
choose to conduct more of their business services internally or through
alternative business services providers. Although we intend to monitor industry
trends and respond accordingly, we cannot assure you that we will be able to
anticipate and successfully respond to such trends in a timely manner. We cannot
be certain that we will be able to compete successfully against current and
future competitors, or that competitive pressure will not have a material
adverse effect on our business, financial condition and results of operations.
ITEM 3. LEGAL PROCEEDINGS
Since September 1999, seven purported stockholder class-action lawsuits
were filed against Century and certain of its current and former directors and
officers, including Michael G. DeGroote, Charles D. Hamm, Jr., Gregory J. Skoda,
Keith W. Reeves, Fred M. Winkler, and Jerome P. Grisko, and have been
consolidated as In Re Century Business Services Securities Litigation, Case No.
1:99CV2200, in the United States District Court for the Northern District of
Ohio. The plaintiffs alleged that the named defendants violated certain
provisions of the Securities Exchange Act of 1934 and certain rules promulgated
thereunder in connection with certain statements made during various periods
from February 1998 through January 2000 by, among other things, improperly
amortizing goodwill and failing adequately to monitor changes in operating
results. The consolidated complaint seeks damages in an unspecified amount. The
United States District Court has appointed lead plaintiff and lead counsel. CBIZ
has filed a motion to dismiss. Responses and replies have been filed by the
parties. The Court has not yet ruled on the motion. There has been no discovery
in any of these actions.
13
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 CBIZ
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. Following the commencement of
discovery and prior to trial, the parties settled all of the litigation between
them on confidential terms that management believes were favorable to CBIZ.
In addition to the above-disclosed items, CBIZ is from time to time subject
to claims and suits arising in the ordinary course of business. Although the
ultimate disposition of such proceedings is not presently determinable,
management does not believe that the ultimate resolution of these matters will
have a material adverse effect on the financial condition, results of operations
or cash flows of CBIZ.
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.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The common stock of CBIZ is quoted on the Nasdaq National Market under the
trading symbol "CBIZ". The table below sets forth the range of high and low
sales prices for the Common Stock as reported on the Nasdaq National Market for
the periods indicated.
PRICE RANGE OF
COMMON STOCK
--------------
HIGH LOW
----- -----
2000
First Quarter............................................. $9.06 $2.06
Second Quarter............................................ 4.00 1.50
Third Quarter............................................. 2.38 1.25
Fourth Quarter............................................ 1.56 0.81
2001
First Quarter............................................. 2.63 1.16
Second Quarter............................................ 5.50 1.59
Third Quarter............................................. 4.78 2.02
Fourth Quarter............................................ 2.75 1.50
On December 31, 2001, the last reported sale price of CBIZ's Common Stock
as reported on the Nasdaq National Market (Nasdaq Amex-Online) was $2.30 per
share. As of March 25, 2002, CBIZ had 10,831 holders of record of its common
stock, and the last sale of CBIZ's common stock as of that date was $3.25.
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.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for CBIZ
and is derived from the historical consolidated financial statements and notes
thereto, which are included elsewhere in this Annual Report of CBIZ. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of CBIZ and the notes thereto, which are
included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
-------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $526,867 $ 567,815 $546,393 $359,468 $179,516
Operating expenses................................ 460,555 510,029 454,051 282,674 155,600
-------- --------- -------- -------- --------
Gross margin...................................... 66,312 57,786 92,342 76,794 23,916
Expenses:
Corporate general and administrative............ 19,797 24,694 19,138 5,155 4,162
Depreciation and amortization................... 42,084 44,335 23,470 11,074 4,128
Merger-related.................................. -- -- 5,789 4,535 416
-------- --------- -------- -------- --------
Operating income (loss)........................... 4,431 (11,243) 43,945 56,030 15,210
Other income (expense):
Interest expense................................ (6,819) (12,113) (6,602) (3,241) (1,216)
Goodwill impairment............................. -- (48,198) -- -- --
Gain (loss) on sale of operations, net.......... (7,113) (31,576) (7,067) 1,450 --
Other income (expense), net..................... 3,838 (7,509) (4,397) 3,361 2,289
-------- --------- -------- -------- --------
Total other income (expense)................ (10,094) (99,396) (18,066) 1,570 1,073
Income (loss) from continuing operations before
income tax expense (benefit).................... (5,663) (110,639) 25,879 57,600 16,283
Income tax expense (benefit)...................... 10,337 (3,379) 14,449 20,590 4,224
-------- --------- -------- -------- --------
Income (loss) from continuing operations.......... (16,000) (107,260) 11,430 37,010 12,059
Income (loss) from operations of discontinued
business, net of tax............................ -- (1,214) (3,596) 6,880 7,992
Loss on disposal of discontinued business, net.... -- (5,697) (391) -- (572)
of tax
Cumulative effect of change in accounting
principle, net of tax........................... -- (11,905) -- -- --
-------- --------- -------- -------- --------
Net income (loss)................................. $(16,000) $(126,076) $ 7,443 $ 43,890 $ 19,479
======== ========= ======== ======== ========
Diluted shares.................................... 94,818 94,674 91,702 81,084 61,412
Diluted earnings (loss) per share:
From continuing operations...................... $ (0.17) $ (1.13) $ 0.12 $ 0.46 $ 0.20
From discontinued operations.................... $ -- $ (0.07) $ (0.04) $ 0.08 $ 0.12
From cumulative effect of accounting change..... $ -- $ (0.13) $ -- $ -- $ --
OTHER DATA:
Goodwill, net of accumulated amortization......... $247,462 $ 281,268 $379,922 $293,553 $ 89,236
Total assets...................................... $523,408 $ 649,494 $809,085 $579,764 $254,105
Total liabilities................................. $152,761 $ 262,556 $295,953 $175,403 $ 92,689
Total stockholders' equity........................ $370,647 $ 386,938 $513,132 $404,361 $161,416
PRO FORMA AMOUNTS ASSUMING 2000 CHANGE IN
ACCOUNTING PRINCIPLE WAS APPLIED RETROACTIVELY:
Net income (loss)................................. $(16,000) $(114,171) $ 2,571 $ 42,224 $ 18,093
Basic earnings (loss) per share................... $ (0.17) $ (1.21) $ 0.03 $ 0.62 $ 0.37
Diluted earnings (loss) per share................. $ (0.17) $ (1.21) $ 0.03 $ 0.52 $ 0.29
16
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, 2001, 2000 and 1999. This discussion should be read in conjunction
with CBIZ's consolidated financial statements and notes thereto included
elsewhere in this Annual Report.
RECENT DEVELOPMENTS
In mid-2001, the SEC mandated that no more than 40% of a company's internal
audit function could be outsourced to the company's independent auditor. Recent
events and turmoil in the accounting profession may serve to limit this further,
thereby changing the environment in which accounting firms provide services to
their clients. During the fourth quarter of 2001, CBIZ entered into an agreement
with HarborView Partners, LLC (HarborView), whereby CBIZ will loan HarborView up
to $2.5 million in working capital, and HarborView will market and originate
internal audit outsource engagements exclusively for and staffed by CBIZ. We
believe this will provide an additional source of revenue to CBIZ primarily
during the third and fourth quarters, when typical seasonal work results in
underutilized resources at CBIZ.
During 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." Among other requirements, these
pronouncements change the rules for goodwill impairment and the valuation
requirements used to measure impairment. As a result of the adoption of SFAS No.
142, of which full adoption is required during 2002, many companies are expected
to look to outside experts as a resource to assist with valuation of goodwill,
tangible assets, and other intangible assets. CBIZ has two business units,
Valuation Counselors and Business Valuation Services, that are experienced in
this type of work. It is expected that the broad-scale implementation of SFAS
141 and 142 will provide an additional source of revenue for both business units
during 2002.
During 2001, CBIZ rationalized and sharpened the focus of its operations by
divesting 20 businesses. CBIZ will continue to divest those non-strategic
businesses that are either under-performing, are located in secondary markets,
or that do not provide the level of synergistic cross-serving opportunities with
other CBIZ businesses that is desired. Although we can not predict the proceeds
for certain units or the resulting gain or loss, additional gains/losses are
expected as future transactions are completed. In conjunction with the focus to
rationalize the business, CBIZ is also focused on acquiring businesses that will
complement its service offerings in those primary markets where CBIZ already has
a significant presence.
OPERATING SEGMENTS
CBIZ currently delivers products and services through three operating
segments. Below is a brief description of these segments' operating results and
factors affecting their businesses. The services offered under each of these
segments are described in Part 1 of this report.
Business Solutions comprised 44% of CBIZ's annual revenue in 2001. A
portion of the revenue from Business Solutions derives from consulting projects
that are discretionary on the part of the client. Demand for such projects
softened in 2001 as a result of slower economic conditions. CBIZ expects its
Business Solutions group to benefit from internal audit engagements through its
agreement with HarborView, wherein internal audit services marketed by
HarborView are staffed by CBIZ employees. This arrangement is expected to
benefit from new regulations effective in August of 2002 requiring a client's
independent auditor to limit the amount of internal audit services it provides
to the client to 40%. In light of recent developments in the accounting
industry, the five largest independent auditors in the country have already
voluntarily discontinued providing both internal and external audit services to
the same client.
Benefits and Insurance Services contributed 28% of CBIZ's annual revenue in
2001. CBIZ's Benefits and Insurance division has benefited in the last year from
a firming of premium prices. Due to a number of factors, including the
increasing costs of health care and an aging population, CBIZ expects premium
pricing to remain stable.
17
National Practices contributed approximately 28% of CBIZ's annual revenue
in 2001. CBIZ's physician practice management subsidiary, which oversees billing
and records compliance for medical professionals, generates approximately 7% of
CBIZ's revenue and has grown 2001 revenue 48% over 2000 revenue. This growth is
attributable to the addition of new clients as well as rising healthcare prices.
Revenue for this practice group is based on a percentage of amounts billed for
their clients.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Revenues
Total revenue for the year ended December 31, 2001 was $526.9 million as
compared to $567.8 million for the year ended December 31, 2000, representing a
decrease of $40.9 million, or 7.2%. The decrease in revenue was primarily
attributable to (i) divestitures completed during the year ended December 31,
2001, and (ii) lower than expected revenue resulting from generally weak
economic conditions. The decrease in revenues attributable to divestitures was
$30.9 million. For business units with a full period of operations for the years
ended December 31, 2001 and 2000, revenue decreased $10.0 million, or 1.9%. From
the period of September through December, the company experienced lower revenues
in most of its business units due to weak economic conditions. Lower revenues
were particularly significant in several lines of business including eleven
business units providing capital markets, IT and other consulting, and 401(k)
administration services. Same unit revenue in these business units fell $17.2
million, or 20.9% in 2001 compared to 2000. During the fourth quarter, same unit
revenue from these business units declined by $6.1 million, or 30.7% compared to
the fourth quarter a year ago.
Expenses
Total expenses (including other expense) decreased to $532.5 million for
the year ended December 31, 2001, from $678.5 million for the comparable period
in 2000, representing a decrease of $146.0 million, or 21.5%. Such decrease was
primarily attributable to (i) lower personnel and facility costs, partially as a
result of divestitures, (ii) lower technology expenditures, (iii) reductions in
goodwill amortization as a result of goodwill impairment charges recorded in
2000, and (iv) a decrease in bad debt expense. Although bad debt expense was
higher than management's expectation in 2001 due to client bankruptcies and
weaker economic conditions, the levels of bad debt in 2001 decreased by
approximately $17.4 million from 2000. In 2000, CBIZ recorded bad debt expense
of $26.7 million, of which $15.5 million was recorded in the fourth quarter.
This fourth quarter charge was primary related to disruption and management
turnover in 2000 that caused deterioration in the receivables portfolio.
Operating expenses decreased to $460.6 million for the year ended December
31, 2001, from $510.0 million for the comparable period in 2000, representing a
decrease of $49.4 million, or 9.7%. Such decrease was primarily attributable to
reductions in personnel costs of $15.5 million, facility costs of $1.3 million,
and the reduction in bad debt expense of $17.4 million. These reductions in
expenses were primarily from ongoing operations, although a portion of the
reductions are a result of divestitures completed subsequent to December 31,
2000. Other operating costs such as commission expense and product costs have
also decreased due to decreased revenue. As a percentage of revenue, operating
expenses for the year ended December 31, 2001 were 87.4% compared to 89.8% for
the year ended December 31, 2000, representing a decrease of 2.4%.
Corporate general and administrative expenses decreased to $19.8 million
for the year ended December 31, 2001, from $24.7 million for the comparable
period in 2000, representing a decrease of $4.9 million, or 19.8%. Such decrease
was attributable to lower personnel costs of $1.2 million and lower technology
expenditures of $2.8 million. Corporate general and administrative expenses
represented 3.8% of total revenues for the year ended December 31, 2001,
compared to 4.3% for the comparable period in 2000.
Depreciation and amortization expense decreased to $42.1 million for the
year ended December 31, 2001, from $44.3 million for the comparable period in
2000, representing a decrease of $2.2 million, or 5.0 %. The decrease is
primarily attributable to lower goodwill amortization of $4.1 million as a
result of goodwill impairment recorded in the fourth quarter of 2000 and a
reduction in goodwill related to divestures completed in 2000 and 2001. The
decrease is primarily offset by an increase in depreciation expense related to
capital
18
expenditures, a significant amount of which occurred in 2000, which were
primarily related to consolidation efforts. As a percentage of revenue,
depreciation and amortization expense increased to 8.0% for the year ended
December 31, 2001 from 7.8% for the comparable period in 2000.
Interest expense decreased to $6.8 million for the year ended December 31,
2001, from $12.1 million for the same period in 2000, a decrease of $5.3
million, or 43.8%. The decrease is a result of CBIZ paying down its bank debt
during 2001 from $117.5 million to $55 million, a reduction in debt of $62.5
million. Additionally, CBIZ's average interest rate on bank debt dropped
throughout 2001. The weighted average interest rate on bank debt was 7.6% for
the year ended December 31, 2001 compared to 8.7% for the same period in 2000,
and includes the effect of the interest rate swap in 2001.
CBIZ recorded a loss on sale of operations of $7.1 million for the year
ended December 31, 2001, as compared to $31.6 million for the year ended
December 31, 2000. Such charges in 2001 are related to i) the sale of three
non-core operations in the first quarter for $2.4 million; ii) the sale of three
business units for $9.4 million and the closure of three non-core business unit
in the second quarter; iii) the sale of a book of business in the third quarter
for $0.2 million; and iv) the sale of five non-core operations in the fourth
quarter for proceeds of $4.5 million, and the estimated loss for five business
units to be closed or divested, based on estimated proceeds. Such charges in
2000 are the result of i) the divestiture of three business units previously
announced in December 1999, ii) the sale of CBIZ's franchise operations
announced on November 2, 2000 for $3.8 million, and iii) the loss related to the
planned divestiture of two additional business units to be completed in 2001 of
$27.2 million.
Other income (expense), net was $3.8 million of income for the year ended
December 31, 2001, as compared to $7.5 million of expense for the comparable
period in 2000, representing a change of approximately $11.3 million, or 150.7%.
In 2001, other expense is comprised primarily of $2.7 million of interest income
and $2.2 million of miscellaneous income offset by $0.6 million of loss on sale
of assets and $0.6 million of other expenses. In 2000, other expense is
comprised primarily of $1.6 million impairment of note received in connection
with the sale on environmental properties in 1997, $3.8 million related to the
settlement of and reserve for certain legal proceedings, $0.4 million related to
the closing of operations; and $2.7 million related to software and other asset
impairment, offset by interest income of $3.9 million.
CBIZ recorded income tax expense from continuing operations of $10.3
million for the year ended December 31, 2001, compared with an income tax
benefit of $3.4 million in 2000. CBIZ expensed goodwill amortization of $21.9
million in 2001, a majority of which was not deductible for tax purposes. In
addition, CBIZ reduced goodwill by $13.8 million in 2001 in connection with
divestures, of which $11.4 million was not deductible for tax purposes. As a
result of these adjustments, CBIZ's taxable income was significantly higher than
the $5.7 million pretax loss reported, resulting in a tax expense of $10.3
million.
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. Internal growth is based on the increase in revenues of companies
that have a full period of operations for the years ended December 31, 2000 and
1999, including companies that are accounted for as pooling-of-interests, as
compared to the comparable period for 1999.
19
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 operating expenses in 2000 was $1.5
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.
20
A goodwill impairment charge of $48.2 million was recorded for the year
ended December 31, 2000. This charge was a result of 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 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 70.7%. In 2000, other expense is
comprised primarily of: a) $1.6 million impairment of note received in
connection with the sale on environmental properties in 1997; b) $3.8 million
related to the settlement and reserve of certain legal proceeds; c) $0.4 million
related to the closing of operations; and d) $2.7 million related to software
and other asset impairment, offset by interest income. In 1999, other expense of
$8.9 million was 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.
CBIZ recorded an income tax benefit from continuing operations of $3.4 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 17 to CBIZ's consolidated financial statements included herewith.
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 2000 and 1999.
In June 2000, CBIZ announced that it had entered into a binding agreement
with Avalon National Corporation (ANC) 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 an additional tax benefit of approximately $5.0 million.
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.
See notes 16 and 21 to CBIZ's consolidated financial statements contained
herewith.
21
FINANCIAL CONDITION
Total assets were $523.4 million and total liabilities were $152.8 million
as of December 31, 2001 and shareholders equity was $370.6 million. Current
assets of $197.2 million exceeded current liabilities of $96.0 million by $101.2
million at December 31, 2001.
Cash and restricted cash held for clients was $55.1 million at December 31,
2001, a decline of $41.4 million from a year ago. The decline in cash balances
was due to the divestiture or closure of certain operations that carried
restricted cash held for clients and due to more active management of operating
cash balances. Surplus operating cash balances are utilized to reduce debt
whenever possible. Accounts receivable were $119.6 million at December 31, 2001,
and declined by $23.1 million from a year ago. The decline in receivables was
due to quicker collection of amounts due, divestitures, and the write-off of
certain accounts that were deemed uncollectible. Other assets, including notes
receivable and property and equipment, are carried at amounts that CBIZ
reasonably estimates reflect the value of these assets, considering current
circumstances and future expectations.
Liabilities include debt for amounts due on CBIZ's credit facility. At
December 31, 2001, the balance due was $55.0 million, a reduction of $62.5
million from a year ago. The reduction in debt is a result of CBIZ's positive
cash flow that has been applied to reduce debt. The accounts payable balance of
$22.1 million reflects amounts due to suppliers and vendors. Client fund
obligations of $36.1 million reflect those liabilities where CBIZ temporarily
holds client cash in connection with processing transactions such as payroll
processing or the payment of insurance premiums and reflects liabilities related
to restricted cash held for clients.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $11.6 million to $4.3 million at
December 31, 2001, from $16.0 million at December 31, 2000. Net cash provided by
operating activities in 2001 was $56.3 million, as compared to $17.4 million in
2000, an increase of $38.8 million. In line with management's objective of
reducing debt during 2001, net cash provided by operating activities was the
principal source of funds used to reduce CBIZ's bank debt by $62.5 million.
Cash used in investing activities during 2001 of $1.4 million consisted of
$14.0 million in proceeds from the disposition of non-core and underperforming
business units, offset by $12.9 million used for capital expenditures, and $1.7
million used toward the acquisition of a technology services business, funding
provided under the HarborView agreement, and contingent consideration for
previous acquisitions (earn-outs). Capital expenditures consisted of leasehold
improvements and equipment in connection with the consolidation of certain
offices and equipment purchases in relation to normal replacement.
Net cash provided by investing activities in 2000 of $7.7 million primarily
consisted of $34.6 million in proceeds received from divestitures, netted
against cash used for capital expenditures of $20.1 million and the funding of
acquisitions and contingent consideration for previous acquisitions of $9.0
million. A significant portion of fixed asset purchases in 2000 were
attributable to the implementation of the enterprise-wide solution to integrate
back office operations.
During the year ended December 31, 2001, cash used in financing activities
of $66.5 million consisted of a net reduction in the bank credit facility of
$62.5 million and net payments of $3.7 million used toward the reduction of
notes payable and capitalized leases. In addition, approximately $0.4 million in
cash was used toward the purchase of 170,000 shares of CBIZ's common stock, in
accordance with CBIZ's Share Repurchase Program approved by the Board of
Directors on August 8, 2001. During the fourth quarter 2001, CBIZ's credit
facility was amended, which restricts CBIZ from repurchasing CBIZ stock in
accordance with the CBIZ Share Repurchase Program.
Cash used in financing activities in 2000 of $33.9 million consisted
primarily of net reduction of $26.5 million in the revolving credit facility and
net payments of $7.5 million toward notes payable and capitalized leases.
22
SOURCES OF CASH
CBIZ's principal source of net operating cash is derived from the
collection of fees from professional services rendered to its clients and
commissions earned in the areas of accounting, tax, valuation and advisory
services, benefits consulting and administration services, insurance, human
resources and payroll solutions, capital advisory, retirement and wealth
management services and technology solutions.
CBIZ's bank line of credit is a $90 million revolving credit facility with
several financial institutions, of which $55 million was outstanding at December
31, 2001. CBIZ's credit facility is subject to commitment reductions, in
connection with business assets that are divested, by an amount equal to the net
proceeds from divestitures. Additionally, the credit facility has a planned
commitment reduction on June 30, 2002, which will bring the facility to $80
million.
See Note 7 to CBIZ's consolidated financial statements included herewith.
USES OF CASH AND LIQUIDITY OUTLOOK
CBIZ's capital expenditures from continuing operations totaled $12.9
million, $20.1 million and $33.7 million for the years ended December 31, 2001,
2000 and 1999, respectively, which included expenditures for fixed assets for
normal replacement, implementation of the enterprise-wide solution to integrate
back office operations and other initiatives, office consolidations, compliance
with regulations and market development. During the year ended December 31,
2001, CBIZ principally funded capital expenditures from operating cash flow and
financing activities. In 2002, capital expenditures are expected to be
approximately $10.0 million, and CBIZ anticipates that during 2002, it will
continue to fund these expenditures from operating cash flow supplemented by
borrowings under its revolving credit facility, as necessary.
CBIZ currently has $33.5 million of available funds under its credit
facility. Management believes that those available funds, along with cash
generated from operations, will be sufficient to meet its liquidity needs in the
foreseeable future.
During the fourth quarter of 2001, CBIZ completed an amendment to its
existing credit facility with its lenders. CBIZ is currently in compliance with
all debt covenants under the amended credit facility. The amendment provided
CBIZ with a waiver of default arising out of its non-compliance with the
interest coverage and leverage ratios for the period ended September 30, 2001.
The amendment also provided for the following changes to the credit facility: 1)
EBITDA targets were reset for the periods ended September 30, 2001, and each
quarter thereafter through December 31, 2002; 2) the covenant that ties the
level of borrowing to the level of accounts receivable was revised so that the
base for accounts receivable and work-in-process were both set at 90 days; 3)
the loan commitment was reduced from $140 million to $90 million at December 31,
2001, with a subsequent planned reduction to $80 million at June 30, 2002; 4)
the applicable margin pertaining to interest rates was increased by 25 basis
points for each level on the pricing grid, and 5) the use of funds for the
repurchase of CBIZ stock was restricted.
CBIZ is currently in compliance with its debt covenants; however, in prior
periods CBIZ has been in violation of its debt covenants from time to time. CBIZ
has been successful in obtaining waivers and amendments to remedy such
violations when they have occurred. However, CBIZ can not be assured that it
will be successful in obtaining waivers or amendments, should CBIZ become in
violation of any covenants in the future. If CBIZ is not able to obtain waivers
or amendments, we could be restricted from borrowing any additional funds from
our credit facility, or required to pay down the outstanding balance on the line
of credit.
To fund operations, capital expenditures and potential acquisitions, CBIZ
may also obtain funding by offering securities or debt, through the public
markets or the private markets. CBIZ currently has a number of shelf
registrations active, under which we can offer such securities. See Note 11 to
the consolidated financial statements contained herein for a description of the
aforementioned registration filings.
23
INTEREST RATE RISK MANAGEMENT
CBIZ entered into an interest rate swap agreement in the third quarter of
2001 to reduce the impact of potential rate increases on variable rate debt
through its credit facility. The interest rate swap has a notional amount of $25
million, a fixed LIBOR rate of 3.58%, and a maturity date of August 2003. CBIZ
accounts for the interest rate swap as a cash flow hedge, whereby the fair value
of the interest rate swap is reflected as an asset or liability in the
accompanying consolidated balance sheet. The interest rate swap (hedging
instrument) matches the notional amount, interest rate index and re-pricing
dates as those that exist under the variable rate debt through its credit
facility (hedged item). When the interest rate index is below the fixed rate
LIBOR, the change in fair value of the instrument represents a change in
intrinsic value, which is an effective hedge. This portion of change in value
will be recorded as other comprehensive income (loss). For the year ended
December 31, 2001, the change in fair value resulted in a loss of approximately
$0.2 million, which is recorded as other comprehensive income (loss).
CRITICAL ACCOUNTING POLICIES
The policies discussed below are considered by management to be critical to
the understanding of CBIZ's consolidated financial statements because their
application places significant demand on management's judgment, with financial
reporting results relying on estimation about the effects of matters that are
inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these policies, management
cautions that future events rarely develop exactly as forecast, and the best
estimates routinely require adjustment.
REVENUE RECOGNITION
Revenue is recognized only when all of the following are present:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, our fee to the client is fixed or determinable, and
collectibility is reasonably assured. CBIZ offers a vast array of products and
outsourced business services to its clients. Those services are delivered
through three divisions. A description of revenue recognition, as it relates to
those divisions, is provided below:
BUSINESS SOLUTIONS -- Revenue consists primarily of fees for accounting
services, preparation of tax returns and consulting services. Revenues are
recorded in the period in which they are earned. CBIZ bills clients based upon a
predetermined agreed upon fixed fee or actual hours incurred on client projects
at expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact on any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known.
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans.
Commissions relating to brokerage and agency activities whereby CBIZ has primary
responsibility for the collection of premiums from 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. Life
insurance commissions are recorded on the accrual basis. Commission revenue is
reported net of sub-broker commissions. Contingent commissions are generally
recognized when received. Fee income is recognized as services are rendered.
NATIONAL PRACTICES -- The business units that comprise this division offer
a variety of services. A description of revenue recognition associated with the
primary services is provided below:
- Mergers & Acquisitions and Capital Advisory -- Revenue associated with
non-refundable retainers are recognized on a straight-line basis over the
life of the engagement. Revenue associated with success fee transactions
are recognized when the transaction is completed.
- Technology Consulting -- Revenue associated with hardware and software
sales are recognized upon delivery and acceptance. Revenue associated
with installation and service agreements are recognized as services are
performed. Consulting revenue is recognized on an hourly or per diem fee
basis.
24
- Valuation and Property Tax -- Revenue associated with retainer contracts
are recognized on a straight-line basis over the life of the contract,
which is generally twelve months. Revenue associated with contingency
arrangements is recognized once written notification is received from an
outside third party (e.g., assessor in the case of a property tax
engagement) acknowledging that the revenue cycle has been completed.
- Surety -- Revenue is recognized as bonds are written. With regard to a
retrospective contingent arrangement with a certain carrier, revenue is
recognized based on performance measured by comparing loss ratios for
each respective underwriting year to target loss ratios set by the
carrier.
- Physician Practice Management -- Revenue is recognized when collections
are received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE
The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Specifically, management must make estimates of the
collectability of our accounts receivable, including work-in-progress (unbilled
accounts receivable), related to current period service revenue. Management
analyzes historical bad debts, client credit-worthiness, and current economic
trends and conditions when evaluating the adequacy of the allowance for doubtful
accounts. Significant management judgments and estimates must be made and used
in connection with establishing the allowance for doubtful accounts in any
accounting period. Material differences may result if management made different
judgments or utilized different estimates. Our accounts receivable balance was
$119.6 million, net of allowance for doubtful accounts of $13.3 million as of
December 31, 2001.
VALUATION OF GOODWILL
At December 31, 2001, CBIZ had approximately $247.5 million of goodwill
associated with prior acquisitions. Goodwill is amortized on a straight-line
basis over the expected periods to be benefited, not to exceed 15 years. We
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 business. Beginning in fiscal 2002, CBIZ will adopt the provisions of
SFAS 142, and accordingly, will cease amortization of our remaining goodwill
balance and evaluate goodwill for impairment using the new fair value impairment
guidelines of SFAS 142. In 2001, CBIZ recorded $21.9 million of goodwill
amortization expense. This change to a new method of accounting for goodwill
could result in an impairment charge in fiscal 2002, although such charge (if
any) has yet to be determined.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as
liabilities when it is probable that a liability has been incurred and the
amount of the loss is reasonably estimable. Disclosure is required when there is
a reasonable possibility that the ultimate loss will exceed the recorded
provision. Contingent liabilities are often resolved over long time periods.
Estimating probable losses requires analysis that often depends on judgment
about potential actions by third parties.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the consolidated financial statements. Those policies are
described in Note 1 to the consolidated financial statements contained herein.
25
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets".
SFAS 141 provides for the elimination of the pooling-of-interests method of
accounting for business combinations completed on or after July 1, 2001. SFAS
142 will require that goodwill and other intangible assets with indefinite
useful lives no longer be amortized, but rather tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 is effective
for fiscal years beginning after December 15, 2001. CBIZ plans to adopt SFAS 142
in its fiscal year beginning January 1, 2002. As of the date of adoption, CBIZ
will have $247.5 million of unamortized goodwill, which will be subject to the
transition provisions of SFAS 142. Amortization expense related to goodwill was
approximately $21.9 million and $29.2 million for the years ended December 31,
2001 and 2000, respectively. Because of the extensive effort required to comply
with the new pronouncements, it is not practicable to reasonably estimate the
impact of adopting these statements on CBIZ's consolidated financial statements
at this time, including whether any transitional impairment losses will be
required to be recognized as a cumulative effect of a change in accounting
principle.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. The provisions of SFAS 143 will be
effective for fiscal years beginning after June 15, 2002, however earlier
application is permitted. CBIZ does not believe SFAS 143 will have a significant
impact on our financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Quantitative Information About Market Risk. CBIZ's floating rate debt under
its credit facility exposes the Company to interest rate risk. A change in the
Federal Funds Rate, or the Reference Rate set by the Bank of America (San
Francisco), would affect the rate at which CBIZ could borrow funds under its
credit facility. If market interest rates were to increase or decrease
immediately and uniformly by 100 basis points from the levels at December 31,
2001, interest expense would increase or decrease by $0.6 million annually. CBIZ
has entered into an interest rate swap to minimize the potential impact of
future increases in interest rates. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate Risk
Management," for a further discussion of this financial instrument.
CBIZ does not engage in trading market risk sensitive instruments. Except
for the interest rate swap discussed above, CBIZ does not purchase instruments,
hedges, or "other than trading" instruments that are likely to expose CBIZ to
market risk, whether foreign currency exchange, commodity price or equity price
risk. CBIZ has not issued debt instruments, entered into forward or futures
contracts, or purchased options.
Qualitative Information About Market Risk. CBIZ's primary market risk
exposure is that of interest rate risk. A change in the Federal Funds Rate, or
the reference rate set by the Bank of America (San Francisco), would affect the
rate at which CBIZ could borrow funds under its credit facility. See
"Quantitative Information about Market Risk" for a further discussion on the
potential impact of a change in interest rates.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Proposal No. 1 -- Election of
Directors" in CBIZ's definitive proxy statement relating to the 2002 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.
NAME AGE POSITION(S)
---- --- -----------
EXECUTIVE OFFICERS AND DIRECTORS:
Michael G. DeGroote (1)................... 68 Chairman of the Board
Steven L. Gerard (1)...................... 56 Chief Executive Officer and Director
Jerome P. Grisko, Jr. (1)................. 40 President and Chief Operating Officer
Ware H. Grove (1)......................... 51 Senior Vice President and Chief Financial
Officer
Douglas R. Gowland........................ 60 Senior Vice President
Leonard Miller............................ 62 Senior Vice President, Business Solutions
Robert A. O'Byrne......................... 45 Senior Vice President, Benefits
Administration & Insurance Services Group
Rick L. Burdick (2)....................... 50 Director
Joseph S. DiMartino (3)................... 58 Director
Harve A. Ferrill (2)(3)................... 69 Director
Richard C. Rochon (2)(3).................. 44 Director
OTHER KEY EMPLOYEES:
George A. Dufour.......................... 56 Chief Technology Officer
Teresa E. Bruce........................... 37 Vice President, Human Resources
Chris Spurio.............................. 36 Vice President, Finance
Kelly J. Kuna............................. 32 Controller
Michael W. Gleespen....................... 43 Corporate Secretary and General Counsel
---------------
(1) Member of Management Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
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
28
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, Aviation
Sales Company and Joy Global, Inc.
Jerome P. Grisko, Jr. has served as President and Chief Operating Officer
of CBIZ since February 1, 2000. Mr. Grisko joined CBIZ as Vice President,
Mergers & Acquisitions in September 1998 and was promoted to Senior Vice
President, Mergers & Acquisitions and Legal Affairs in December of 1998. Prior
to joining CBIZ, Mr. Grisko was associated with the law firm of Baker &
Hostetler LLP, where he practiced from September 1987 until September 1998,
serving as a partner of such firm from January 1995 to September 1998. While at
Baker & Hostetler, Mr. Grisko concentrated his practice in the area of mergers,
acquisitions and divestitures.
Ware H. Grove has served as Senior Vice President and Chief Financial
Officer of CBIZ since December 2000. Before joining CBIZ, Mr. Grove served as
Senior Vice President and Chief Financial Officer of Bridgestreet
Accommodations, Inc., which he joined in early 2000 to restructure financing,
develop strategic operating alternatives, and assist with merger negotiations.
Prior to joining Bridgestreet, Mr. Grove served for three years as Vice
President and Chief Financial Officer of Lesco, Inc. 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, 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.
Leonard Miller has served as CBIZ Business Solutions Practice Head since
November 2000 and was appointed Senior Vice President in February 2002. Mr.
Miller was the President and Director of Financial Operations for Miller Wagner
& Company, Ltd. in Phoenix, Arizona for 22 years before the firm joined the
Century Business Services family and became Miller Wagner Business Services,
Inc. and Miller Wagner & Company, PLLC. Mr. Miller was the Regional Managing
Partner for Lester Witte and Company, and was responsible for 11 of its offices
prior to co-founding Miller Wagner & Company, Ltd. With over 38 years of
experience, Mr. Miller is a recognized expert in the fields of finance, real
estate, general business consulting and various litigation support matters.
Professional affiliations include the American Institute of Certified Public
Accountants (AICPA), the Arizona Society of Certified Public Accountants (ASCPA)
and the Illinois Society of Certified Public Accountants (ISCPA).
Robert A. O'Byrne has serves as a Senior Vice President of CBIZ since
December 1998 and is responsible for CBIZ's Benefits Administration & Insurance
Services Group. Mr. O'Byrne served as President and Chief Executive Officer of
employee benefits brokerage/consulting firms Robert D. O'Byrne and Associates,
Inc. and The Grant Nelson Group, Inc. prior to their acquisition by CBIZ in
December 1997. Mr. O'Byrne has more than 23 years of experience in the insurance
and benefits consulting field.
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.
29
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, Plan Vista Corporation, Carlyle Industries, Inc., The Newark
Group, and the Muscular Dystrophy Association.
Harve A. Ferrill has served as a Director of CBIZ since October 1996, when
he was elected as an outside director. Mr. Ferrill served as Chief Executive
Officer and Chairman of Advance Ross Corporation, a company that provides tax
refunding services ("ARC"), from 1992 to 1996. Mr. Ferrill served as President
of Advance Ross Corporation from 1990 to 1992. Since 1996, Advance Ross
Corporation has been a wholly-owned subsidiary of Cendant Corporation. Mr.
Ferrill has served as President of Ferrill-Plauche Co., Inc., a private
investment company, since 1982.
Richard C. Rochon has served as a Director of CBIZ since October 1996, when
he was elected as an outside director. Mr. Rochon is Chairman and Chief
Executive Officer of Royal Palm Capital Partners, a private investment and
management fund. From 1985 to February 2002, Mr. Rochon served in various
capacities with, and most recently as, President of Huizenga Holdings, Inc., a
management and holding company owned by H. Wayne Huizenga. Mr. Rochon also
served, as a director since September 1996 and as Vice Chairman since April
1997, of Boca Resorts, Inc., the owner and operator of luxury resort properties
in South Florida. From 1979 until 1985, Mr. Rochon was employed as a certified
public accountant by the public accounting firm of Coopers & Lybrand, L.L.P. Mr.
Rochon also serves on the Board of Directors of Citizens Bancshares of South
Florida.
OTHER KEY EMPLOYEES:
George A. Dufour was appointed Chief Technology Officer in July 2001. Prior
to joining CBIZ, Mr. Dufour served as Corporate Director of Information Access
Services for University Hospitals Health Systems (UHHS), where he achieved
substantial cost savings by consolidating IS resources throughout the health
system. Prior to joining UHHS in 1999, Mr. Dufour acted as Vice President and
CIO for Akron General Health Systems. From 1986 through 1994, Mr. Dufour was
with Blue Cross/Blue Shield of Ohio and served most recently there as Director
of Information Systems Development. Mr. Dufour commenced his career in
information technology, which includes tenures at Cook United, Cole National
Corporation, General Tire & Rubber, Picker Corporation, and Sherwin Williams, in
1971 as the Director of Education for the Institute of Computer Management, a
division of Litton Industries. Mr. Dufour is a member of the northeast Ohio
chapter of the Healthcare Information Management Systems Society.
Teresa E. Bruce has served as Vice President of Human Resources since
January 1999. From 1995 to 1999 Ms. Bruce served as Director of Human Resources
for Robert D. O'Byrne & Associates, Inc. and The Grant Nelson Group, Inc.,
subsidiaries of CBIZ now known as CBIZ Benefits and Insurance Services, Inc. Ms.
Bruce has over 15 years of experience in human resources and is an active member
of the Greater Kansas City Chapter of The Human Resources Management Association
and Society of Human Resources Management.
Chris Spurio has served as Vice President of Finance since July 1999.
Previously, Mr. Spurio was Controller since January 1998. Mr. Spurio also served
as Acting Chief Financial Officer from May 2000 to December 2000. Mr. Spurio was
associated with KPMG LLP, an international accounting firm, from July 1988 to
January 1998, serving as a Senior Manager of such firm from July 1995 to January
1998. Mr. Spurio is a CPA and a member of the American Institute of Certified
Public Accountants and the Ohio Society of Certified Public Accountants.
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 and General Counsel
since June 2001 and General Counsel since June 2001. Mr. Gleespen is an attorney
and has served as CBIZ's Vice President of Regulatory Compliance and Accountancy
Compliance Officer and Technical Director since February 1998. Prior to joining
30
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. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from the
discussion under the heading "Executive Compensation" in CBIZ's definitive proxy
statement for the 2002 Annual Stockholders' Meeting to be filed with the
Securities and Exchange Commission no later than 120 days after the end of
CBIZ's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from
CBIZ's definitive proxy statement for the 2002 Annual Stockholders' Meeting to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of CBIZ's 2001 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain agreements and transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
CBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
properties owned indirectly by and leased from persons employed by CBIZ. In the
aggregate, CBIZ paid approximately $1.5 million, $1.5 million and $2.1 million
for the years ended 2001, 2000 and 1999, respectively, under such leases which
management believes were at market rates.
Rick L. Burdick, a director of CBIZ, is a partner of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump.) Akin, Gump performed legal work for CBIZ
during 2001, 2000 and 1999 for which the firm received $68,540, $116,000 and
$458,742 from CBIZ, respectively.
CBIZ and/or its subsidiaries maintain joint-referral relationships and
service agreements with licensed CPA firms under which CBIZ subsidiaries provide
administrative services (including office, bookkeeping, accounting, and other
administrative services, preparing marketing and promotion materials, and
leasing of administrative and professional staff) in exchange for a fee. A
number of CBIZ employees own interests in the independent companies maintaining
administrative services agreements with CBIZ. Leonard Miller, a Senior Vice
President, owned a 14.29% interest in an independent company maintaining an
administrative services agreement with a CBIZ subsidiary. Under the agreement,
the independent company paid CBIZ $2,438,026 to pay for costs related to the use
of CBIZ office space and facilities, and administrative and professional staff
in the engagements of the independent company.
Robert A. O'Byrne, a Senior Vice President, was indebted to CBIZ in the
amount of $325,000 at December 31, 2001 and 2000. Mr. O'Byrne also has an
interest in a partnership that receives commissions from CBIZ that are paid to
certain eligible benefits and insurance producers in accordance with a formal
program to provide benefits in the event of death, disability, retirement or
other termination. The note and the program were both in existence at the time
CBIZ acquired the former company, of which Mr. O'Byrne was an owner.
CBIZ has divested several operations during 2001, in an effort to
rationalize the business and sharpen the focus on non-strategic businesses. In
accordance with this strategy, CBIZ has sold and may sell in the future
businesses to former employees or shareholders. Management believes these
transactions were priced at market rates, competitively bid, and entered into at
arm's length terms and conditions.
31
PART IV
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 F-1 of this
Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to "Index to
Financial Statements" on page F-1 of this Annual Report.
3. Exhibits.
The following documents are filed as exhibits to this Form 10-K
pursuant to Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of CBIZ
(filed as Exhibit 3.1 to CBIZ's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2 Certificate of Amendment of the Certificate of Incorporation
of CBIZ dated October 18, 1996 (filed as Exhibit 3.2 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
3.3 Certificate of Amendment of the Certificate of Incorporation
of CBIZ effective December 23, 1997 (filed as Exhibit 3.3 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference).
3.4 Certificate of Amendment of the Certificate of Incorporation
of CBIZ dated September 10, 1998 (filed as Exhibit 3.4 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference).
3.5 Amended and Restated Bylaws of CBIZ (filed as Exhibit 3.2 to
CBIZ's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference).
4.1 Form of Stock Certificate of Common Stock of CBIZ (filed as
Exhibit 4.1 to CBIZ's Annual Report Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference).
4.4 CBIZ Business Services Employee Stock Investment Plan (filed
as exhibit 4.4 to CBIZ's Report on Form S-8 filed June 1,
2001, and incorporated herein by reference).
10.1 Amended and Restated Credit Agreement dated as of October 3,
1997, and as Amended and Restated as of August 10, 1998 and
August 24, 1999 by and among CBIZ and Bank of America, N.A.
as Agent and Letter of Credit Issuing Bank and Swing Line
Bank and Other Financial Institutions (filed as Exhibit 99.9
to CBIZ's Report on Form 10-Q for the period ended September
30, 1999, and incorporated herein by reference).
10.2 First Amendment to Amended and Restated Credit Agreement
dated March 24, 2000, by and among CBIZ and the Lenders
party to the Credit Agreement (filed as exhibit 10.2 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference).
10.3 Second Amendment to Amended and Restated Credit Agreement
dated May 12, 2000, by and among CBIZ and the Lenders party
to the Credit Agreement (filed as exhibit 10.3 to CBIZ's
Annual Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
32
EXHIBIT NO. DESCRIPTION
----------- -----------
10.4 Third Amendment to Amended and Restated Credit Agreement
dated September 22, 2000, by and among CBIZ and the Lenders
party to the Credit Agreement (filed as Exhibit 99.6 to
CBIZ's Quarterly Report on Form 10-Q for the period ended
September 30, 2000, and incorporated herein by reference).
10.5 Fourth Amendment to Amended and Restated Credit Agreement,
dated March 30, 2001, by and among CBIZ and the Lenders
party to the Credit Agreement (filed as exhibit 10.5 to
CBIZ's Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
10.6* Fifth Amendment to Amended and Restated Credit Agreement,
dated November 9, 2001, by and among CBIZ and the Lenders
party to the Credit Agreement.
10.7 Form of Warrant to purchase 900,000 shares of CBIZ's common
stock issued to Jackson National Life Insurance Company
(filed as Exhibit 10.2 to CBIZ's Annual Report Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference).
10.8 1996 Employee Stock Option Plan (filed as Appendix I to
CBIZ's Proxy Statement 1997 Annual Meeting of Stockholders
dated April 1, 1997 and incorporated herein by reference).
10.9 Amendment to the 1996 Employee Stock Option Plan (filed as
Exhibit 99.2 to CBIZ's Current Report on Form 8-K dated
December 14, 1998, and filed January 12, 1999 and
incorporated herein by reference).
10.10 Amendment to the 1996 Employee Stock Option Plan ( filed on
Secretary's Certificate as Exhibit 10.10 to CBIZ's Annual
Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference).
10.11 Agents 1997 Stock Option Plan (filed as Appendix II to
CBIZ's Proxy Statement 1997 Annual Meeting of Stockholders
dated April 1, 1997 and incorporated herein by reference).
10.12 Severance Protection Agreement by and between Century
Business Services, Inc. and Jerome P. Grisko, Jr. (filed as
exhibit 10.11 to CBIZ's Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
10.13 Severance Protection Agreement by and between Century
Business Services, Inc. and Charles D. Hamm, Jr. (filed as
exhibit 10.12 to CBIZ's Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
10.14 Employment Agreement by and between Century Business
Services, Inc. and Steven L. Gerard. (filed as exhibit 10.13
to CBIZ's Report on Form 10-K for the year ended December
31, 2000, and incorporated herein by reference).
10.15 Employment Agreement by and between Century Business
Services, Inc. and Ware H. Grove. (filed as exhibit 10.14 to
CBIZ's Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
10.16* Note and Warrant Purchase agreement by and between
HarborView Partners, LLC, and Century Business Services,
Inc, dated September 26, 2001.
21.1* List of Subsidiaries of Century Business Services, Inc.
23* Consent of KPMG LLP
24* Powers of attorney (included on the signature page hereto).
---------------
* Indicates documents filed herewith.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the three months
ended December 31, 2001.
33
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 29,
2002
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.
/s/ STEVEN L. GERARD /s/ JOSEPH S. DIMARTINO
----------------------------------------------------- -----------------------------------------------------
Steven L. Gerard Joseph S. DiMartino
Chief Executive Officer and Director Director
/s/ MICHAEL G. DEGROOTE /s/ HARVE A. FERRILL
----------------------------------------------------- -----------------------------------------------------
Michael G. DeGroote Harve A. Ferrill
Chairman of the Board Director
/s/ WARE H. GROVE /s/ RICHARD C. ROCHON
----------------------------------------------------- -----------------------------------------------------
Ware H. Grove Richard C. Rochon
Chief Financial Officer Director
(Principal Financial and Accounting Officer)
/s/ RICK L. BURDICK
-----------------------------------------------------
Rick L. Burdick
Director
34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 2001 and
2000................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... F-6
Notes to the Consolidated Financial Statements............ F-7
Schedule II -- Valuation and Qualifying Accounts and
Reserves for the years ended December 31, 2001, 2000
and 1999............................................... F-35
Schedule III -- Supplemental Insurance Information for the
year ended December 31, 1999........................... F-36
Schedule IV -- Reinsurance for the year ended December 31,
1999................................................... F-37
F-1
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 F-1. 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 F-1. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, 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 17 to the consolidated financial
statements, the Company adopted Securities and Exchange Commission Staff
Accounting Bulletin No. 101 and changed certain revenue recognition policies
effective January 1, 2000.
/s/ KPMG LLP
Cleveland, Ohio
February 19, 2002
F-2
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,340 $ 15,970
Restricted cash and funds held for clients................ 50,847 80,590
Accounts receivable, less allowance for doubtful accounts
of $13,319 and $22,156................................. 119,612 142,682
Notes receivable -- current............................... 2,260 667
Income taxes recoverable.................................. 2,798 22,519
Deferred income taxes..................................... 6,213 9,895
Other current assets...................................... 11,133 13,864
-------- --------
Total current assets.............................. 197,203 286,187
Goodwill, net of accumulated amortization of $73,145 and
$47,261................................................... 247,462 281,268
Property and equipment, net of accumulated depreciation of
$39,514 and $29,813....................................... 54,189 59,349
Notes receivable -- non-current............................. 5,000 3,564
Deferred income taxes -- non-current........................ 7,429 2,028
Other assets................................................ 12,125 17,098
-------- --------
Total Assets...................................... $523,408 $649,494
======== ========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 22,116 $ 35,220
Notes payable and capitalized leases -- current........... 1,201 4,382
Client fund obligations................................... 36,108 39,719
Accrued expenses.......................................... 36,554 45,455
-------- --------
Total current liabilities......................... 95,979 124,776
Bank debt................................................... 55,000 117,500
Notes payable and capitalized leases -- non-current......... 951 1,432
Accrued expenses............................................ 831 18,848
-------- --------
Total Liabilities................................. 152,761 262,556
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized -- 250,000 shares
Issued and outstanding -- 94,879 shares at December 31,
2001;
94,697 shares at December
31, 2000............................................... 949 947
Additional paid-in capital.................................. 439,136 438,681
Accumulated deficit......................................... (67,906) (51,906)
Treasury stock.............................................. (1,308) (754)
Accumulated other comprehensive loss........................ (224) (30)
-------- --------
Total Stockholders' Equity........................ 370,647 386,938
Commitments and Contingencies
-------- --------
Total Liabilities and Stockholders' Equity........ $523,408 $649,494
======== ========
See the accompanying notes to the consolidated financial statements.
F-3
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999
-------- --------- --------
Revenue..................................................... $526,867 $ 567,815 $546,393
Operating expenses.......................................... 460,555 510,029 454,051
-------- --------- --------
Gross margin................................................ 66,312 57,786 92,342
Corporate general and administrative........................ 19,797 24,694 19,138
Depreciation and amortization............................... 42,084 44,335 23,470
Merger-related.............................................. -- -- 5,789
-------- --------- --------
Operating income (loss)..................................... 4,431 (11,243) 43,945
-------- --------- --------
Other income (expense):
Interest expense.......................................... (6,819) (12,113) (6,602)
Goodwill impairment....................................... -- (48,198) --
Loss on sale of operations, net........................... (7,113) (31,576) (7,067)
Other income (expense), net............................... 3,838 (7,509) (4,397)
-------- --------- --------
Total other expense, net.......................... (10,094) (99,396) (18,066)
Income (loss) from continuing operations before income tax
expense (benefit)......................................... (5,663) (110,639) 25,879
Income tax expense (benefit)................................ 10,337 (3,379) 14,449
-------- --------- --------
Income (loss) from continuing operations.................... (16,000) (107,260) 11,430
Loss from operations of discontinued business, net of income
tax benefit of $0, $1,261 and $1,068, respectively........ -- (1,214) (3,596)
Loss on disposal of discontinued business, net of income tax
benefit of $0, $3,002 and $210, respectively.............. -- (5,697) (391)
-------- --------- --------
Income (loss) before cumulative effect of change in
accounting principle...................................... (16,000) (114,171) 7,443
Cumulative effect of change in accounting principle, net of
income tax benefit of $7,936.............................. -- (11,905) --
-------- --------- --------
Net income (loss)........................................... $(16,000) $(126,076) $ 7,443
======== ========= ========
Earnings (loss) per share:
Basic:
Continuing operations.................................. $ (0.17) $ (1.13) $ 0.13
Discontinued operations................................ -- (0.07) (0.04)
Cumulative effect of change in accounting principle.... -- (0.13) --
-------- --------- --------
Net income (loss)...................................... $ (0.17) $ (1.33) $ 0.09
======== ========= ========
Diluted:
Continuing operations.................................. $ (0.17) $ (1.13) $ 0.12
Discontinued operations................................ -- (0.07) (0.04)
Cumulative effect of change in accounting principle.... -- (0.13) --
-------- --------- --------
Net income (loss)...................................... $ (0.17) $ (1.33) $ 0.08
======== ========= ========
Weighted-average common shares outstanding:
Basic.................................................. 94,818 94,674 86,851
======== ========= ========
Diluted................................................ 94,818 94,674 91,702
======== ========= ========
See the accompanying notes to the consolidated financial statements.
F-4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS UNEARNED OTHER
COMMON PAID-IN (ACCUM. ESOP TREASURY COMPREHENSIVE
SHARES STOCK CAPITAL DEFICIT) SHARES STOCK INCOME (LOSS) TOTALS
------ ------ ---------- --------- -------- -------- ------------- --------
December 31, 1998......... 79,560 $795 $336,743 $ 69,327 $(2,549) $ (74) $ 119 $404,361
Comprehensive income:
Net income............ -- -- -- 7,443 -- -- -- 7,443
Foreign translation
and other........... -- -- -- -- -- -- 63 63
Change in unrealized
appreciation, net of
tax................. -- -- -- -- -- -- (2,656) (2,656)
------ ---- -------- --------- ------- ------- ------- --------
Total
comprehensive
income......... -- -- -- 7,443 -- -- (2,593) 4,850
------ ---- -------- --------- ------- ------- ------- --------
Pre-merger transactions
of pooled entities.... -- -- (32) (2,600) -- 74 -- (2,558)
Allocation of ESOP
shares................ -- -- 164 -- -- -- -- 164
Purchase of treasury
stock................. -- -- -- -- 754 (754) -- --
Stock issuances......... 1,744 18 24,982 -- -- -- -- 25,000
Stock options........... 1 -- 267 -- -- -- -- 267
Warrants................ 4,365 44 18,480 -- -- -- -- 18,524
Business acquisitions
and contingent
payments.............. 7,671 76 62,448 -- -- -- -- 62,524
------ ---- -------- --------- ------- ------- ------- --------
December 31, 1999......... 93,341 933 443,052 74,170 (1,795) (754) (2,474) 513,132
Comprehensive loss:
Net loss.............. -- -- -- (126,076) -- -- -- (126,076)
Change in unrealized
appreciation, net
of tax........... -- -- -- -- -- -- 2,444 2,444
------ ---- -------- --------- ------- ------- ------- --------
Total
comprehensive
loss........... -- -- -- (126,076) -- -- 2,444 (123,632)
------ ---- -------- --------- ------- ------- ------- --------
Allocation of ESOP...... -- -- (1,795) -- 1,795 -- -- --
Warrants................ 56 1 157 -- -- -- -- 158
Business acquisitions
and contingent
payments.............. 1,300 13 (2,733) -- -- -- -- (2,720)
------ ---- -------- --------- ------- ------- ------- --------
December 31, 2000......... 94,697 947 438,681 (51,906) -- (754) (30) 386,938
Comprehensive loss:
Net loss................ -- -- -- (16,000) -- -- -- (16,000)
Change in unrealized
appreciation, net of
tax................. -- -- -- -- -- -- (194) (194)
------ ---- -------- --------- ------- ------- ------- --------
Total
comprehensive
loss........... -- -- -- (16,000) -- -- (194) (16,194)
------ ---- -------- --------- ------- ------- ------- --------
Share repurchase...... -- -- -- -- -- (439) -- (439)
Divestiture
consideration....... -- -- -- -- -- (115) -- (115)
Stock options......... 34 -- 144 -- -- -- -- 144
Business acquisitions
and contingent
payments............ 148 2 311 -- -- -- -- 313
------ ---- -------- --------- ------- ------- ------- --------
December 31, 2001......... 94,879 $949 $439,136 $ (67,906) $ -- $(1,308) $ (224) $370,647
====== ==== ======== ========= ======= ======= ======= ========
See the accompanying notes to the consolidated financial statements.
F-5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
-------- --------- ---------
Cash flows from operating activities:
Income (loss) from continuing operations.................. $(16,000) $(107,260) $ 11,430
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Consolidation and integration accrual.................. -- -- 20,366
Bad debt expense, net of recoveries.................... 8,725 26,693 9,831
Accounts receivable reduction due to change in
accounting principle................................. -- 19,209 --
Note impairment charge................................. -- 1,640 8,952
Loss on sale of operations............................. 7,113 31,576 7,067
Depreciation and amortization.......................... 42,084 44,335 23,470
Goodwill impairment.................................... -- 48,198 --
Deferred income taxes.................................. (1,719) (1,494) (8,787)
Changes in assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable, net............................... 4,238 (20,946) (57,661)
Other assets........................................... 3,107 (2,872) (8,164)
Accounts payable....................................... (10,035) (6,715) 83
Income taxes........................................... 19,721 (7,734) (22,766)
Accrued expenses and other liabilities................. (1,018) (8,251) (14,485)
Other, net............................................. 34 1,068 4,791
-------- --------- ---------
Net cash provided by (used in) operating
activities...................................... 56,250 17,447 (25,873)
-------- --------- ---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired and contingent
consideration.......................................... (1,665) (8,973) (42,994)
Proceeds from dispositions of businesses.................. 14,005 34,599 --
Additions to property and equipment....................... (12,926) (20,136) (33,725)
Net (increase) decrease in notes receivable............... (842) 2,194 1,402
-------- --------- ---------
Net cash provided by (used in) investing
activities...................................... (1,428) 7,684 (75,317)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from bank debt................................... 27,900 102,600 226,000
Proceeds from notes payable and capitalized leases........ 478 3,296 13,003
Payment of bank debt...................................... (90,400) (129,100) (126,000)
Payment of notes payable and capitalized leases........... (4,135) (10,838) (55,989)
Pre-merger equity transactions............................ -- -- (2,558)
Proceeds from stock issuances, net of treasury
repurchase............................................. (410) 17 25,000
Proceeds from exercise of stock options and warrants...... 115 124 18,791
-------- --------- ---------
Net cash provided by (used in) financing
activities...................................... (66,452) (33,901) 98,247
-------- --------- ---------
Net decrease in cash and cash equivalents................... (11,630) (8,770) (2,943)
Cash and cash equivalents at beginning of year.............. 15,970 24,740 27,683
-------- --------- ---------
Cash and cash equivalents at end of year.................... $ 4,340 $ 15,970 $ 24,740
======== ========= =========
See the accompanying notes to the consolidated financial statements.
F-6
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 through its three divisions: business solutions, benefits and insurance
services, and national practices.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
CBIZ and its wholly owned subsidiaries. All 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, as 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 carrier. A related liability for these funds is recorded in accrued
expenses and other liabilities in the consolidated balance sheets.
Derivative Instruments and Hedging Activities
In January 2001, CBIZ adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Gains and losses
resulting from
F-7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
changes in 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. CBIZ entered into an interest rate swap agreement which qualifies as
a cash flow hedge in 2001. For the year ended December 31, 2001, the change in
fair value relating to CBIZ's hedging activity resulted in a loss of
approximately $0.2 million, which is recorded in stockholders equity under
accumulated other comprehensive loss.
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, as the interest rate on the bank
debt is variable and approximates current market rates.
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 events 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.
During 2001, CBIZ reduced goodwill by $13.8 million as a result of the
divestiture or closing of eight business units in 2001 and the planned
divestiture or closing of an additional two business units in 2002. During 2000,
CBIZ recorded a goodwill impairment charge of $48.2 million, and goodwill was
reduced by $27.2 million as a result of the divestiture of two business units
and the planned divestiture of two additional business units in 2000. See notes
16 and 18 for additional information regarding these charges.
Amortization expense from continuing operations was approximately $21.9
million, $29.2 million, and $12.7 million in 2001, 2000, and 1999, 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 carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Revenue Recognition and SAB 101
Revenue is recognized only when all of the following are present:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, our fee to the client is fixed or determinable, and
collectibility is reasonably assured. CBIZ offers a vast array of outsourced
business services to its clients. Those
F-8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
services are delivered through three divisions. A description of revenue
recognition, as it relates to those divisions, is provided below:
BUSINESS SOLUTIONS -- Revenue consists primarily of fees for accounting
services, preparation of tax returns and consulting services. Revenues are
recorded in the period in which they are earned. CBIZ bills clients based upon a
predetermined agreed upon fixed fee or actual hours incurred on client projects
at expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact on any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known.
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans.
Commissions relating to brokerage and agency activities whereby CBIZ has primary
responsibility for the collection of premiums from 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. Life
insurance commissions are recorded on the accrual basis. Commission revenue is
reported net of sub-broker commissions. Contingent commissions are generally
recognized when received. Fee income is recognized as services are rendered.
NATIONAL PRACTICES -- The business units that comprise this division offer
a variety of services. A description of revenue recognition associated with the
primary services is provided below:
- Mergers & Acquisitions and Capital Advisory -- Revenue associated with
non-refundable retainers are recognized on a straight-line basis over the
life of the engagement. Revenue associated with success fee transactions
are recognized when the transaction is completed.
- Technology Consulting -- Revenue associated with hardware and software
sales are recognized upon delivery and acceptance. Revenue associated
with installation and service agreements are recognized as services are
performed. Consulting revenue is recognized on an hourly or per diem fee
basis.
- Valuation and Property Tax -- Revenue associated with retainer contracts
are recognized on a straight-line basis over the life of the contract,
which is generally twelve months. Revenue associated with contingency
arrangements is recognized once written notification is received from an
outside third party (e.g., assessor in the case of a property tax
engagement) acknowledging that the revenue cycle has been completed.
- Surety -- Revenue is recognized as bonds are written. With regard to a
retrospective contingent arrangement with a certain carrier, revenue is
recognized based on performance measured by comparing loss ratios for
each respective underwriting year to target loss ratios set by the
carrier.
- Physician Practice Management -- Revenue is recognized when collections
are received on our clients' patient accounts.
During the fourth quarter of 2000, CBIZ adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
the Financial Statements." SAB 101 summarizes 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 mil-
F-9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
lion (pretax). See note 6 for the impact on deferred taxes and note 18 for the
impact on previously reported quarterly financial information.
Earnings per Share
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of stock options, warrants and
contingent shares.
Stock 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
11 to the consolidated financial statements.
Reclassifications
Certain amounts in the prior periods consolidated financial statements have
been reclassified to conform to the current year's presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable for the year ended December 31, 2001 and 2000 were as
follows:
2001 2000
-------- --------
Trade accounts receivable................................... $110,046 $132,558
Work-in-process, at net realizable value.................... 22,885 32,280
-------- --------
Total accounts receivable................................... 132,931 164,838
Less allowance for doubtful accounts........................ (13,319) (22,156)
-------- --------
Accounts receivable, net.................................... $119,612 $142,682
======== ========
3. NOTES RECEIVABLE
At December 31, 2001 and 2000, notes receivable consist largely of a note
receivable taken in connection with the spin off of the hazardous waste
operations to the stockholders of Republic Industries, Inc. in 1997. The
remaining balance consists of notes from divestitures, which occurred during
2001, and a note receivable totaling $1 million related to HarborView Partners
LLC (HarborView). In accordance with the agreement between HarborView and CBIZ,
CBIZ may provide working capital up to $2.5 million contingent upon the growth
of HarborView.
4. INVESTMENTS
Included in other assets (non-current) at December 31, 2001 and 2000, are
investments accounted for under the cost method of accounting of $2.2 million
and $2.7 million, respectively. CBIZ acquired an ownership interest of
approximately 20% in Fundscape.com, which was being accounted for under the
equity method in 1999. In 2000, CBIZ's ownership interest dropped to 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, 2001 and 2000, CBIZ's investment in QuikCAT.com was $1.3
million and $1.8 million, respectively. In addition, CBIZ has an outstanding
trade receivable from QuikCAT.com of $0.5 million at both December 31, 2001 and
2000. Although the market value of CBIZ's investments in
F-10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Fundscape.com and QuikCAT.com are not readily determinable, management believes
the fair value of these investments approximates their carrying amounts.
5. PROPERTY AND EQUIPMENT
Property and equipment, net at December 31, 2001 and 2000 consisted of the
following (in thousands):
2001 2000
-------- --------
Buildings and improvement................................... $ 10,428 $ 8,420
Furniture and fixtures...................................... 21,160 21,063
Equipment and capitalized software.......................... 62,115 59,679
-------- --------
93,703 89,162
Accumulated depreciation and amortization................... (39,514) (29,813)
-------- --------
$ 54,189 $ 59,349
======== ========
Depreciation and amortization expense (excluding goodwill amortization
expense) was approximately $20.2 million, $15.2 million and $10.8 million 2001,
2000 and 1999, respectively.
6. INCOME TAXES
A summary of income tax expense (benefit) included in the consolidated
statements of operations is as follows (in thousands):
2001 2000 1999
------- -------- -------
Continuing operations:
Current:
Federal and international.......................... $ 7,894 $ 1,789 $20,991
State and local.................................... 4,162 798 2,245
------- -------- -------
12,056 2,587 23,236
Deferred.............................................. (1,719) (5,966) (8,787)
------- -------- -------
Total continuing operations................... 10,337 (3,379) 14,449
Discontinued operations................................. -- (1,261) (1,068)
Loss on sale of discontinued operations................. -- (3,002) (210)
Cumulative effect of change in accounting principle..... -- (7,936) --
------- -------- -------
$10,337 $(15,578) $13,171
======= ======== =======
F-11
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The provision (benefit) for income taxes attributable to earnings (loss)
from continuing operations differed from the amount obtained by applying the
federal statutory income tax rate to income (loss) from continuing operations
before income taxes, as follows (in thousands):
2001 2000 1999
------- -------- -------
Tax at statutory rate................................... $(1,982) $(38,724) $ 9,058
State taxes (net of federal benefit).................... (129) (1,171) 658
Change in valuation allowance........................... 1,503 700 --
Nondeductible goodwill.................................. 6,432 21,853 3,837
Acquired nontaxable entities............................ -- -- (1,762)
Disposal of non-core business units..................... 3,998 13,022 2,163
Other, net.............................................. 515 941 495
------- -------- -------
Provision (benefit) for income taxes from continuing
operations............................................ $10,337 $ (3,379) $14,449
======= ======== =======
Effective income tax rate............................... (182.6)% 3.1% 55.8%
======= ======== =======
Pro forma effective income tax rate on pooled
entities.............................................. (182.6)% 3.1% 62.6%
======= ======== =======
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, 2001 and 2000, are as follows (in thousands):
2001 2000
------- -------
Deferred Tax Assets:
Net operating loss carryforwards............................ $ 7,062 $ 4,382
Allowance for doubtful accounts............................. 4,530 5,612
Consolidation and integration............................... 1,357 2,547
Cumulative change in accounting principle (SAB 101)......... 3,723 7,936
Goodwill impairment......................................... 5,597 4,014
Nondeductible reserve....................................... 1,387 1,707
Other deferred tax assets................................... 670 1,486
------- -------
Total gross deferred tax assets........................... 24,326 27,684
Less: valuation allowance................................. (2,679) (1,176)
------- -------
Net deferred tax assets................................... 21,647 26,508
------- -------
Deferred Tax Liabilities:
Change in accounting method................................. 2,940 7,351
Disposal of non-core business units......................... 1,333 1,816
Asset basis differential.................................... 3,632 3,345
Other deferred tax liabilities.............................. 100 2,073
------- -------
Total gross deferred tax liabilities...................... 8,005 14,585
------- -------
Net deferred tax asset...................................... $13,642 $11,923
======= =======
CBIZ had U.S. net operating loss (NOL) carryforwards of approximately $5.5
million at December 31, 2001 and 2000, from the separate return years of certain
acquired entities. These losses are subject to limitations regarding the offset
of CBIZ's future taxable income and will begin to expire in 2007. CBIZ has a
Canadian NOL carryforward, of which the balance was approximately $3.3 million
and $3.6 million at December 31, 2001, and
F-12
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2000, respectively. The Canadian NOL carryforward begins to expire in 2006. CBIZ
also had state NOL carryforwards with a tax benefit of $3.5 million and $0.8
million at December 31, 2001 and 2000, which have various expiration dates. The
availability of all the NOL's is reported in the financial statements as
deferred tax assets, net of the applicable valuation allowance.
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., Canadian,
and state NOL carryforwards. The net change in the valuation allowance for the
years ended December 31, 2001 and 2000 was an increase of $1.5 million and $0.4
million, respectively, and was recorded as an addition to income tax expense.
The portion of the valuation allowance for deferred tax assets for which
subsequently recognized tax benefits will be allocated to reduce goodwill of
acquired entities is $0.5 million at December 31, 2001 and 2000.
CBIZ made income tax payments of $14.8 million in 2001, and received
refunds in the amount of $23.8 million.
7. BANK DEBT, NOTES PAYABLE AND CAPITALIZED LEASES
Bank debt, notes payable and capitalized leases, consist of the following
(in thousands):
DECEMBER 31,
------------------
2001 2000
------- --------
Bank debt:
Revolving credit facilities, effective rates of 4.9% to
10.625%................................................ $55,000 $117,500
======= ========
Weighted average rate..................................... 7.6% 8.7%
======= ========
Notes payable and capitalized leases:
Promissory notes payable to former owners of acquired
businesses, primarily non-interest bearing............. $ 170 $ 367
Other notes payable, effective rates of 4.75% to 7.0%, due
2002 to 2007........................................... 1,610 4,742
Capitalized leases, effective rates of 6.5% to 22.4%,
payable in installments through 2005................... 372 705
------- --------
$ 2,152 $ 5,814
======= ========
CBIZ has a $90 million revolving credit facility with a group of 11 banks.
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 2003. As security for the payment on the credit facility debt, CBIZ has
assigned to the lending group a continuing security interest in accounts
receivables of its subsidiaries, except for accounts receivable with any
governmental authority.
In the ordinary course of business, CBIZ provides letters of credit to
certain lessors in lieu of security deposits. Letters of credit under the credit
facility were $1.5 million and $0.6 million as of December 31, 2001, and 2000,
respectively. Management does not believes it is practicable to estimate the
fair value of these financial instruments, and does not expect any material
losses to result from these off-balance sheet instruments because performance is
not expected to be required.
In November, 2001 CBIZ completed an amendment to its existing credit
facility with its lenders. The amendment provided the following changes to the
credit facility: 1) EBITDA targets were reset for the periods
F-13
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
ended September 30, 2001 and each quarter thereafter through December 31, 2002;
2) the covenant that ties the level of borrowing to the level of accounts
receivable was revised to set the borrowing base for accounts receivable and
work-in-process to 90 days; 3) the loan commitment was reduced from $140 million
to $90 million, with a subsequent planned reduction to $80 million at June 30,
2002; 4) the applicable margin pertaining to the interest rates was increased by
25 basis points for each level on the pricing grid, and 5) restrictions were
placed on the use of funds for the repurchase of CBIZ stock.
The bank credit agreement contains certain financial covenants. These
covenants require CBIZ to maintain (i) minimum consolidated net worth; (ii)
minimum consolidated leverage ratio; (iii) maximum interest coverage ratio; and
(iv) minimum EBITDA levels. CBIZ is in compliance with its covenants as of
December 31, 2001.
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, 2001, aggregate maturities of notes payable, bank debt and
capitalized leases, were as follows (in thousands):
YEARS ENDING DECEMBER 31,
-------------------------
2002........................................................ $ 1,201
2003........................................................ 55,419
2004........................................................ 264
2005........................................................ 183
2006........................................................ 38
Thereafter.................................................. 47
-------
$57,152
=======
Management believes that the carrying amounts of bank debt, notes payable
and capitalized leases recorded at December 31, 2001 approximate fair values.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
CBIZ leases certain of its premises and equipment under various operating
lease agreements. At December 31, 2001, future minimum rental commitments
becoming payable under all operating leases are as follows (in thousands):
YEARS ENDING DECEMBER 31,
-------------------------
2002........................................................ $ 23,531
2003........................................................ 19,331
2004........................................................ 16,908
2005........................................................ 13,328
2006........................................................ 11,242
Thereafter.................................................. 26,236
--------
$110,576
========
Total rental expense incurred under operating leases was approximately
$30.4 million, $27.4 million, and $26.3 million in 2001, 2000 and 1999,
respectively.
F-14
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Legal Proceedings
Since September 1999, seven purported stockholder class-action lawsuits
were filed against Century and certain of its current and former directors and
officers, including Michael G. DeGroote, Charles D. Hamm, Jr., Gregory J. Skoda,
Keith W. Reeves, Fred M. Winkler, and Jerome P. Grisko, and have been
consolidated as In Re Century Business Services Securities Litigation, Case No.
1:99CV2200, in the United States District Court for the Northern District of
Ohio. The plaintiffs alleged that the named defendants violated certain
provisions of the Securities Exchange Act of 1934 and certain rules promulgated
thereunder in connection with certain statements made during various periods
from February 1998 through January 2000 by, among other things, improperly
amortizing goodwill and failing adequately to monitor changes in operating
results. The consolidated complaint seeks damages in an unspecified amount. The
United States District Court has appointed lead plaintiff and lead counsel. CBIZ
has filed a motion to dismiss. Responses and replies have been filed by the
parties. The Court has not yet ruled on the motion. 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 CBIZ
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. Following the commencement of
discovery and prior to trial, the parties settled all of the litigation between
them on confidential terms that management believes were favorable to CBIZ.
In addition to the above-disclosed items, CBIZ is from time to time subject
to claims and suits arising in the ordinary course of business. Although the
ultimate disposition of such proceedings is not presently determinable,
management does not believe that the ultimate resolution of these matters will
have a material adverse effect on the financial condition, results of operations
or cash flows of CBIZ.
9. CONSOLIDATION AND INTEGRATION RESERVE
During the fourth quarter of fiscal 1999, Century's Board of Directors
approved a plan (the 1999 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.
F-15
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidation and integration reserve balances as of December 31, 2001,
2000 and 1999, and activity during the twelve-month periods ended December 31,
2001 and 2000 were as follows (in thousands):
1999 PLAN OTHER PLANS
--------------------------- -------------
LEASE SEVERANCE & LEASE
CONSOLIDATION BENEFITS CONSOLIDATION
------------- ----------- -------------
Reserve balance at December 31, 1999............ $ 9,400 $ 4,150 $ --
Amounts adjusted to income (1)................ (5,901) (2,445) 2,385
Payments...................................... (656) (1,256) --
------- ------- -------
Reserve balance at December 31, 2000............ 2,843 449 2,385
Amounts adjusted to income (1)................ (495) (234) 940
Payments...................................... (1,251) (215) (1,030)
------- ------- -------
Reserve balance at December 31, 2001............ $ 1,097 $ -- $ 2,295
======= ======= =======
---------------
(1) Amounts adjusted to income are included in operating expense and corporate
general and administrative expense in the accompanying consolidated
statement of operations for the twelve-month periods then ended. See the
table below for the respective amounts recorded in each line item.
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 leaders
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.
During 2001, CBIZ reduced approximately $0.6 million of accruals related to
non-cancelable lease obligations, due to the fact that the consolidations in the
San Jose and St. Louis markets will not be completed within the original
timeframe, offset by the addition of $0.1 million of accruals to cover lease
costs under the original plan not subleased in the original time frame. CBIZ
also reduced approximately $0.2 million of accruals related to severance due to
the accrual being higher than the actual severance expense for those
consolidations that have been completed.
In addition to the consolidation activity described above that relates to
the original accrual, CBIZ has incurred expenses related to noncancellable lease
obligations related to consolidations in other markets, abandonment of leases,
and severance obligations related to these consolidations, as well as
expense-reduction initiatives. For the twelve month periods ended December 31,
2001, charges related primarily to the consolidation activity in the Chicago,
Philadelphia, Phoenix, Cleveland, Columbus, and Southern California markets.
During the fourth quarter of 2000, expenses were incurred related to the
consolidation of two operating units in the Los Angeles market place. Also, CBIZ
incurred costs (net of sublease income) related to abandonment of lease space in
Philadelphia and Columbia, Maryland.
F-16
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidation and integration charges incurred for years ended December 31,
2001, 2000 and 1999 were as follows ($ in thousands):
2001 2000 1999
--------------------- ---------------------------- -------------------------------
CORPORATE CORPORATE LOSS CORPORATE
OPERATING G&A OPERATING G&A ON OPERATING G&A LOSS ON
EXPENSE EXPENSE EXPENSE EXPENSE SALE EXPENSE EXPENSE SALE
--------- --------- --------- --------- ---- --------- --------- -------
CONSOLIDATION AND INTEGRATION
CHARGES NOT IN 1999 PLAN:
Severance expense............ $ 296 $ 185 $ 1,767 $ 3,255 $ -- $ -- $ -- $ --
Lease consolidation and
abandonment................ 1,231 -- 3,214 64 -- -- -- --
Other consolidation
charges.................... 1,052 -- -- -- -- -- -- --
Shared service and
consolidation.............. -- -- 963 626 -- -- -- --
Write-down of non-core
businesses................. -- -- 449 -- 566 -- 2,535 7,067
------ ----- ------- ------- ---- ------- ------ ------
Subtotal................... 2,579 185 6,393 3,945 566 -- 2,535 7,067
CONSOLIDATION AND INTEGRATION
FOR THE 1999 PLAN:
Adjustment to lease
accrual.................... (495) -- (5,901) -- -- 9,400 -- --
Adjustment to severance
accrual.................... (127) (107) (64) (2,381) -- 1,030 3,765 --
Other consolidation
charges.................... -- -- -- -- -- 3,471 138 --
------ ----- ------- ------- ---- ------- ------ ------
Total consolidation and
integration charges........ $1,957 $ 78 $ 428 $ 1,564 $566 $13,901 $6,438 $7,067
====== ===== ======= ======= ==== ======= ====== ======
10. 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 2001, 2000 and 1999,
amounted to approximately $5.0 million, $5.6 million, and $4.7 million,
respectively.
Two acquisitions made in 1998 and 1999 had employee stock option plans
(ESOP) which were subsequently frozen by CBIZ. The ESOP related to the 1999
acquisition was terminated in 2000, and as required under the Statement of
Position No. 93-6, the difference between the cost of the remaining unearned
ESOP shares and the fair value of those shares of approximately $1.8 million has
been charged to additional paid-in capital in the accompanying consolidated
statements of stockholders' equity.
11. 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 U.S. Bank, N.A.
F-17
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
In February 1999, CBIZ issued 1,800,000 restricted shares of common stock
and 900,000 warrants to an outside party for a $25 million equity investment in
CBIZ. Fifty percent of the common stock is subject to a one-year lock-up
restriction, while the remaining common stock is subject to a two-year lock-up
restriction, and warrants to purchase shares of common stock may be exercised
under the following terms: 300,000 shares for three years at $20 per share;
300,000 shares for four years at $25 per share; and 300,000 for five years at
$30 per share.
TREASURY STOCK
In August 2001, CBIZ's Board of Directors authorized the implementation of
a share repurchase plan. The initial plan authorized the purchase of up to one
million shares of CBIZ's common stock over the first six months of the plan. In
accordance with the plan, CBIZ purchases shares though the open market and can
privately negotiate purchases and reserve them for possible use in the future in
connection with acquisitions, the employee stock investment plan and other
general purposes. The repurchase program does not obligate CBIZ to acquire any
specific number of shares and may be suspended at any time. As of December 31,
2001, CBIZ repurchased 170,000 shares at a cost of $0.4 million.
During the fourth quarter 2001, CBIZ's credit facility was amended, which
included the removal of a certain provision that had allowed a portion of the
credit facility to be used toward CBIZ's Share Repurchase Program.
EMPLOYEE STOCK INVESTMENT PLAN
Effective June 1, 2001, CBIZ announced the Employee Stock Investment Plan
which provides CBIZ employees with a method of purchasing shares of CBIZ's
common stock, $.01 par value per share. Participation in the plan is open to all
CBIZ employees whose payroll is processed by the designated CBIZ payroll
provider. CBIZ pays all opening and transaction charges, other that those due
upon the sale of the shares.
Participants may also purchase shares of CBIZ Stock by making optional cash
investments in accordance with the provisions of the Plan. Shares of CBIZ Stock
purchased by participants in the Plan may be treasury or new issue stock, or at
CBIZ's option, CBIZ Stock purchased in the open market or negotiated
transactions. Treasury or new issue stock is purchased from CBIZ at the market
price on the applicable investment date. The price of CBIZ Stock purchased in
the open market or in negotiated transactions is the weighted average price at
which the shares are actually purchased.
WARRANTS
In connection with the spin off of the hazardous waste operations
(including CBIZ's predecessor company) to the stockholders of Republic
Industries, Inc. (the "RESI Transaction") in 1996, RESI agreed to issue to
holders of unexpired warrants of its former parent, additional RESI warrants to
acquire shares of RESI's Common Stock equal to one fifth of the number of shares
available. At the Distribution date, RESI adjusted the per share exercise price
of the RESI warrants to reflect the effect of the distribution on the market
prices of RESI and its former parent's common stock. These warrants are
designated as stapled warrants and expired at various
F-18
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
dates through December 2000. Prior to the expiration of such warrants, the
holders of these warrants were able to exercise under the original terms of the
warrants and receive CBIZ stock.
In addition to warrants issued through the RESI Transaction, CBIZ also
issued warrants in connection with private placements completed in October 1996,
December 1996, and April 1997, and granted warrants in connection with certain
acquisitions made during 1997. Portions of the warrants issued in connection
with 1997 acquisitions are restricted from being transferred in accordance with
various lock-up agreements between the former shareholders of the acquired
entities and CBIZ.
During 1999, certain holders of warrants issued in connection with 1997
acquisitions gave up demand registration rights due to them. In November 1999,
the Board of Directors extended the expiration dates of the aforementioned
warrant holders by an additional twelve months in consideration of forgoing
demand registration rights. In December 1999, the Board of Directors extended
the expiration dates of certain warrants outstanding from the December 1996 and
April 1997 private placements through June 2000. As consideration for the
extension of the term, the holders of the warrants will pay the original
exercise price, plus a premium for each month from the original expiration date
to the exercise date, upon exercise of the warrants.
Information relating to warrants to purchase common stock is summarized
below (in thousands):
2001 2000 1999
------ ------ ------
Outstanding at beginning of year............................ 6,170 10,012 13,477
Granted/issued.............................................. -- -- 900
Expired/cancelled........................................... (4,370) (3,786) --
Exercised................................................... -- (56) (4,365)
------ ------ ------
Outstanding at end of year (a).............................. 1,800 6,170 10,012
====== ====== ======
Exercisable at end of year.................................. 1,800 6,170 10,012
====== ====== ======
---------------
(a) Exercise prices for warrants outstanding at December 31, 2001 ranged from
$13.00 to $30.00. Exercise prices for warrants outstanding at December 31,
2000 ranged from $3.875 to $30.00. Exercise prices for warrants outstanding
at December 31, 1999 ranged from $1.60 to $30.00.
STOCK OPTIONS
Under the 1997 Agents Stock Option Plan, a maximum of 1,200,000 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 13,000,000 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 six-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
F-19
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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):
2001 2000 1999
------ ------ -----
Outstanding at beginning of year............................ 7,858 5,394 3,581
Granted (a)................................................. 3,420 4,501 1,951
Exercised (b)............................................... (34) -- (2)
Expired or canceled......................................... (1,592) (2,037) (136)
------ ------ -----
Outstanding at end of year (c).............................. 9,652 7,858 5,394
====== ====== =====
Exercisable at end of year (d).............................. 3,086 1,870 969
====== ====== =====
Available for future grant at the end of year............... 3,472 2,301 2,806
====== ====== =====
---------------
(a) Options were granted at average prices of $1.54, $2.98 and $14.05 in 2001,
2000 and 1999, respectively.
(b) Options were exercised at a price of $3.41 in 2001. No options were
exercised in 2000. Options were exercised at prices ranging from $1.08 to
$9.63 and averaging $5.35 in 1999.
(c) Exercise prices for options outstanding at December 31, 2001 ranged from
$1.08 to $17.75 and averaged $5.49 with expiration dates ranging from May
2002 to December 2007. Exercise prices for options outstanding at December
31, 2000 ranged from $1.08 to $17.75 and averaged $8.17 with expiration
dates ranging from May 2002 to December 2006. 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.
(d) Exercise prices for options exercisable at December 31, 2001, 2000, and 1999
averaged $8.50, $11.59 and $11.67, respectively.
Had the cost of stock option plans been determined based on the fair value
of options at the grant date, CBIZ's net income (loss) and earnings (loss) per
share pro forma amounts would be as follows (amounts in thousands, except per
share data):
AS REPORTED PRO FORMA
--------------------- ---------------------
BASIC DILUTED BASIC DILUTED
--------- --------- --------- ---------
2001
Net loss................................ $ (16,000) $ (16,000) $ (19,205) $ (19,205)
========= ========= ========= =========
Net loss per share...................... $ (0.17) $ (0.17) $ (0.20) $ (0.20)
========= ========= ========= =========
2000
Net loss................................ $(126,076) $(126,076) $(129,112) $(129,112)
========= ========= ========= =========
Net loss per share...................... $ (1.33) $ (1.33) $ (1.36) $ (1.36)
========= ========= ========= =========
1999
Net income.............................. $ 7,443 $ 7,443 $ 5,067 $ 5,067
========= ========= ========= =========
Net income per share.................... $ 0.09 $ 0.08 $ 0.06 $ 0.06
========= ========= ========= =========
The above results may not be representative of the effects on net income
for future years.
F-20
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CBIZ applied the Black-Scholes option-pricing model to determine the fair
value of each option granted in 2001, 2000 and 1999. Below is a summary of the
assumptions used in the calculation:
2001 2000 1999
----- ----- -----
Risk-free interest rate..................................... 4.39% 4.98% 6.30%
Expected volatility......................................... 76.38% 62.80% 30.00%
Expected option life (in years)............................. 3.75 3.75 3.75
12. EARNINGS PER SHARE
For the years presented, CBIZ presents both basic and diluted earnings per
share. The following data shows the amounts used in computing earnings (loss)
per share and the effect on the weighted average number of shares of dilutive
potential common stock (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.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator
Net income (loss) (a)............................... $(16,000) $(126,076) $ 7,443
Denominator:
Basic
Weighted average common shares................... 94,818 94,674 86,851
Diluted
Warrants (b)..................................... -- -- 4,411
Options (b)...................................... -- -- 228
Contingent shares (b)............................ -- -- 212
-------- --------- -------
Total....................................... 94,818 94,674 91,702
======== ========= =======
Basic EPS (a)......................................... $ (0.17) $ (1.33) $ 0.09
======== ========= =======
Diluted EPS (a)....................................... $ (0.17) $ (1.33) $ 0.08
======== ========= =======
Pro forma income data -- unaudited (a):
Pro forma net income (loss)......................... $(16,000) $(126,076) $ 5,681
======== ========= =======
Basic EPS........................................... $ (0.17) $ (1.33) $ 0.07
======== ========= =======
Diluted EPS......................................... $ (0.17) $ (1.33) $ 0.06
======== ========= =======
---------------
(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 1,624 and 325 in 2001 and 2000, respectively, have been excluded
from diluted weighted average shares, as the net loss for the period would
cause the incremental shares to be antidilutive.
Basic earnings (loss) per share was computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during the
year.
F-21
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
During 2001, CBIZ received consideration for divestitures of $1.0 million
in the form of notes receivable in lieu of cash. CBIZ also reduced approximately
$0.5 million of accruals for non-cancelable lease obligations and $0.2 million
for severance obligations due to changes in the consolidation and integration
plan.
During 2000, CBIZ reduced approximately $8.4 million of accruals for
non-cancelable lease obligations and severance obligations due to changes in the
consolidation and integration plan.
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.
CASH PAID (RECEIVED) DURING THE YEAR FOR (IN THOUSANDS):
2001 2000 1999
------- ------- -------
Interest................................................. $ 6,916 $12,156 $ 6,813
======= ======= =======
Income taxes............................................. $(8,982) $ 2,540 $39,521
======= ======= =======
14. RELATED PARTIES
The following is a summary of certain agreements and transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
CBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
properties owned indirectly by and leased from persons employed by CBIZ. In the
aggregate, CBIZ paid approximately $1.5 million, $1.5 million and $2.1 million
for the years ended 2001, 2000 and 1999, respectively, under such leases which
management believes were at market rates.
Rick L. Burdick, a director of CBIZ, is a partner of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump.) Akin, Gump performed legal work for CBIZ
during 2001, 2000 and 1999 for which the firm received $68,540, $116,000 and
$458,742 from CBIZ, respectively.
CBIZ and/or its subsidiaries maintain joint-referral relationships and
service agreements with licensed CPA firms under which CBIZ subsidiaries provide
administrative services (including office, bookkeeping, accounting, and other
administrative services, preparing marketing and promotion materials, and
leasing of administrative and professional staff) in exchange for a fee. A
number of CBIZ employees own interests in the independent companies maintaining
administrative services agreements with CBIZ. Leonard Miller, a Senior Vice
President, owned a 14.29% interest in an independent company maintaining an
administrative services agreement with a CBIZ subsidiary. Under the agreement,
the independent company paid CBIZ $2,438,026 to pay for costs related to the use
of CBIZ office space and facilities, and administrative and professional staff
in the engagements of the independent company.
Robert A. O'Byrne, a Senior Vice President, was indebted to CBIZ in the
amount of $325,000 at December 31, 2001 and 2000. Mr. O'Byrne also has an
interest in a partnership that receives commissions from CBIZ that are paid to
certain eligible benefits and insurance producers in accordance with a formal
program to provide benefits in the event of death, disability, retirement or
other termination. The note and the program were both in existence at the time
CBIZ acquired the former company, of which Mr. O'Byrne was an owner.
CBIZ has divested several operations during 2001, in an effort to
rationalize the business and sharpen the focus on non-strategic businesses. In
accordance with this strategy, CBIZ has sold and may sell in the future
businesses to former employees or shareholders. Management believes these
transactions were priced at market rates, competitively bid, and entered into at
arm's length terms and conditions.
F-22
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. ACQUISITIONS
In May 2001, CBIZ acquired one business solutions firm which was accounted
for under the purchase method of accounting. Accordingly, the operating results
of the acquired company have been included in the accompanying consolidated
financial statements since the date of the acquisition. The aggregate purchase
price of this acquisition was approximately $0.3 million in cash. The excess of
the purchase price over fair value of the net assets acquired (goodwill) was
approximately $0.1 million, and is being amortized over a 15-year period.
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
$3.4 million and is being amortized over a 15-year period.
As a result of the nature of the assets and liabilities of the businesses
acquired, there were no material identifiable intangible assets or liabilities.
Future contingent consideration is recorded as additional purchase price when
performance goals have been met and shares and cash have been released from
escrow.
The pro forma revenue and results of operations for the acquisitions
completed in 2001, 2000 and 1999, had the acquisitions occurred at the beginning
of such fiscal years, are not significant, and accordingly, have not been
provided.
Several pooling-of-interests transactions completed in 1999 involved
enterprises that previously had not been subjected to income taxes. Accordingly,
pro forma adjustments have been presented in the table below ($ in thousands,
except per share amounts).
1999
-------
Pro forma income data -- unaudited:
Income (loss) from continuing operations.................. $11,430
Pro forma adjustment for income tax expense............... 1,762
-------
Pro forma income from continuing operations............... $ 9,668
=======
Pro forma earnings (loss) per share from continuing
operations:
Basic earnings (loss) per share........................ $ 0.11
=======
Diluted earnings (loss) per share...................... $ 0.11
=======
16. DIVESTITURES
During fiscal 2001, CBIZ recorded a charge of $7.1 million related to a)
the divestiture of two business units previously announced in December 2000, b)
the divestiture or closing of thirteen business units throughout 2001, and c)
loss related to the planned divestiture or closing of five additional business
units to be completed in 2002. The components of the charge recorded in fiscal
2001 are provided below:
- In the first quarter of 2001, CBIZ completed the sale of three non-core
business operations for an aggregate price of $2.4 million, which
resulted in a pretax loss of $0.1 million. CBIZ also recorded an
additional charge of $2.2 million related to the divestiture of another
business unit that was completed in the second quarter of 2001.
F-23
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- In the second quarter of 2001, CBIZ completed the sale of three business
units for an aggregate price of $9.4 million, which resulted in a pretax
gain of $0.9 million. In addition, CBIZ closed three non-core business
for a loss of less than $0.1 million.
- In the third quarter of 2001, CBIZ completed the sale of a small
insurance operation for an aggregate price of $0.2 million, which
resulted in a pretax gain of $0.2 million.
- In the fourth quarter of 2001, CBIZ completed the sale of five non-core
business operations for an aggregate price $4.5 million, which resulted
in a pretax gain of $0.3 million. In addition, CBIZ identified five
business units to be divested or closed, the expected proceeds from which
are $5.7 million. Based on the expected proceeds from these sales, CBIZ
recorded a provision for loss on sale of approximately $6.1 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 sale
were $5.4 million, which resulted in loss on sale of approximately $3.8
million. In addition, 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.) During 2001, CBIZ
received $0.5 million in cash, against this contingent note, which was
recorded in other income. 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 October 2000, CBIZ completed the sale of its risk-bearing specialty
insurance segment (which included Century Surety Company, Evergreen National
Indemnity Company, and Continental Heritage Insurance Company) for $28 million,
resulting in a loss on disposal of discontinued business, net of tax, of $5.7
million for the year ended December 31, 2000. See Note 21 for further
information regarding the risk-bearing specialty insurance segment.
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
operations held for sale in the accompanying consolidated statement of
operations.
17. 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
F-24
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$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 once the volume threshold has been met. Prior to SAB 101, CBIZ
accrued for such commission revenue periodically based on the probability
of meeting or exceeding the required threshold.
- Revenue related to CBIZ's 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. This change has no impact
on net income.
Adoption of the aforementioned revenue recognition policies retroactive to
1999 would have produced the following pro forma results (in thousands, except
per share amounts):
1999
------
AS REPORTED:
Income before change in accounting principle................ $7,443
Income per share, basic..................................... $ 0.09
Income per share, diluted................................... $ 0.08
PRO FORMA:
Income assuming new accounting principle is applied
retroactively............................................. $2,571
Income per share, basic..................................... $ 0.03
Income per share, diluted................................... $ 0.03
CBIZ recognized $10.1 million of revenue in 2000 which was included as a
component of the cumulative effect of a change in accounting principle. During
2001, CBIZ recognized $1.0 million of revenue.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal years 2001 and 2000. CBIZ has included the following restated
information below to demonstrate the effect on the first, second and
F-25
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
third quarters of fiscal year 2000 as if the provisions of SAB No. 101 (See Note
17, Change in Accounting Principle), had been applied as of the beginning of the
fiscal year (in thousands, except per share amounts):
2001
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Revenues.............................. $162,375 $132,663 $117,931 $113,898
======== ======== ======== ========
Income (loss) from continuing
operations.......................... $ 9,347 $ 1,964 $ (9,155) $(18,156)
======== ======== ======== ========
Net income (loss)..................... $ 9,347 $ 1,964 $ (9,155) $(18,156)
======== ======== ======== ========
Earnings (loss) per share:
Basic --
Continuing operations............ $ 0.10 $ 0.02 $ (0.10) $ (0.19)
======== ======== ======== ========
Net income (loss)................ $ 0.10 $ 0.02 $ (0.10) $ (0.19)
======== ======== ======== ========
Earnings (loss) per share:
Diluted --
Continuing operations............ $ 0.10 $ 0.02 $ (0.10) $ (0.19)
======== ======== ======== ========
Net income (loss)................ $ 0.10 $ 0.02 $ (0.10) $ (0.19)
======== ======== ======== ========
Basic shares.......................... 94,825 94,903 94,919 94,754
======== ======== ======== ========
Diluted shares........................ 95,301 97,099 94,919 94,754
======== ======== ======== ========
F-26
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2000
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Revenues.............................. $170,468 $144,873 $132,624 $ 119,850
======== ======== ======== =========
Income (loss) from continuing
operations.......................... $ 10,013 $ 1,287 $ (3,683) $(114,877)
Income (loss) from discontinued
operations.......................... (1,083) (9,098) 784 2,486
Cumulative effect of accounting
change.............................. (11,905) -- -- --
-------- -------- -------- ---------
Net loss.............................. $ (2,975) $ (7,811) $ (2,899) $(112,391)
======== ======== ======== =========
Earnings (loss) per share:
Basic --
Continuing operations............... $ 0.11 $ 0.01 $ (0.04) $ (1.21)
Discontinued operations............. (0.01) (0.09) 0.01 0.03
Cumulative Effect................ (0.13) -- -- --
-------- -------- -------- ---------
Net loss......................... $ (0.03) $ (0.08) $ (0.03) $ (1.18)
======== ======== ======== =========
Earnings (loss) per share:
Diluted --
Continuing operations............ $ 0.11 $ 0.01 $ (0.04) $ (1.21)
Discontinued operations.......... (0.01) (0.09) 0.01 0.03
Cumulative Effect................ (0.13) -- -- --
-------- -------- -------- ---------
Net loss......................... $ (0.03) $ (0.08) $ (0.03) $ (1.18)
======== ======== ======== =========
Basic shares.......................... 93,218 93,264 93,645 94,697
======== ======== ======== =========
Diluted shares........................ 94,516 94,938 94,345 94,697
======== ======== ======== =========
Certain fourth-quarter adjustments were made in 2000 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
F-27
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
quarter events discussed below that contributed to CBIZ's net loss reported in
the fourth quarter of 2000 (in thousands):
2000
--------
SAB 101 adjustments:
Reduction of revenue...................................... $ 6,268
Reduction of expense...................................... (4,192)
--------
Subtotal............................................... $ 2,076
Consolidation and integration charges:
Lease consolidation....................................... $ 2,395
Severance................................................. 905
Other consolidation related charges....................... 651
--------
Subtotal............................................... $ 3,951
Other charges:
Goodwill impairment....................................... 48,198
Additional accounts receivable reserves and write-off's... 16,083
Loss on sale of divested businesses....................... 31,576
Note impairment........................................... 1,640
Litigation and other asset impairment..................... 14,978
--------
Total.................................................. $118,502
========
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 17 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 accordingly, an impairment charge of approximately $48.2 million was
required to reduce 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. Such charges are the result of the sale of CBIZ's franchise
operations announced November 2, 2000 at a loss of $3.8 million, and the loss
related to the planned divestiture of two additional business units to be
completed in 2001 for $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 8 regarding legal proceedings); asset impairment and
write-downs in connection with closing the operations in Toronto, Canada; and
strategic changes in the business.
F-28
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
19. SEGMENT DISCLOSURES
CBIZ's business units have been aggregated into three reportable segments:
business solutions, benefits and insurance and national practices. The business
units have been aggregated based on the following factors: similarity of the
products and services; similarity of the regulatory environment; the long term
performance of these units is affected by similar economic conditions; and the
business is managed along these segment lines, which each report to a Practice
Group Leader.
Business Solutions. The business solutions division offers services in the
following areas: tax planning and preparation; cash flow management; strategic
planning; consulting; record-keeping; federal, state and local tax return
preparation; tax planning based on financial and investment alternatives; tax
structuring of business transactions such as mergers and acquisitions; quarterly
and year-end payroll tax reporting; corporate, partnership and fiduciary tax
planning and return preparation; outsourced chief financial officer services and
other financial staff services; financial investment analysis, succession,
retirement, and estate planning; and profitability, operational and efficiency
enhancement consulting to a number of specialized industries.
Benefits and Insurance Services. The Benefits and Insurance division
offers services in the following areas: employee benefits, brokerage,
consulting, and administration, including the design, implementation and
administration of qualified plans, such as 401(k) plans, profit-sharing plans,
defined benefit plans, and money purchase plans; actuarial services; health and
welfare benefits consulting, including group health insurance plans; dental and
vision care programs; group life insurance programs; accidental death and
dismemberment and disability programs; COBRA administration and voluntary
insurance programs; health care and dependent care spending accounts; premium
reimbursement plans; communications services to inform and educate employees
about their benefit programs; executive benefits consulting on non-qualified
retirement plans and business continuation plans; specialty high-risk life
insurance; employee benefit worksite marketing; and wealth management services,
including Registered Investment Advisory Services, Investment Policy Statements,
also known as IPS, mutual fund selection based on IPS and ongoing mutual fund
monitoring.
National Practices. The National Practices division offers services in the
following areas: payroll processing and administration; valuations of
commercial, tangible, and intangible assets and financial securities; mergers
and acquisitions and capital advisory services, physician practice management,
health care consulting, government relations; process improvement; and
technology consulting, including strategic technology planning, project
management, development, network design and implementation and software
selection and implementation.
Corporate and other charges represent costs at the corporate office that
are not allocated to the business units, which include goodwill amortization for
all acquisitions accounted for under the purchase method of accounting. Also
included in corporate and other charges are consolidation and integration
charges of approximately $21.1 million during 1999.
Prior to 2001, CBIZ reported under four reportable segments: business
solutions, benefits and insurance, performance consulting, and technology
services. CBIZ reorganized its management structure and changed from four
reportable segments to the three described above. Segment information for the
years ended December 31, 2000 and 1999 have been reclassified in accordance with
the new segments.
CBIZ operates in the United States and Toronto, Canada and there is no one
customer that represents a significant portion of sales.
F-29
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Segment information for the years ended December 31, 2001, 2000, and 1999
was as follows (in thousands):
2001
----------------------------------------------------------
BUSINESS BENEFITS & NATIONAL CORPORATE
SOLUTIONS INSURANCE PRACTICES AND OTHER TOTAL
--------- ---------- --------- --------- ---------
Revenue................................ $234,944 $144,905 $147,018 $ -- $ 526,867
Operating expenses..................... 202,027 117,112 132,918 8,498 460,555
-------- -------- -------- --------- ---------
Gross margin......................... 32,917 27,793 14,100 (8,498) 66,312
Corporate gen. and admin............... -- -- -- 19,797 19,797
Depreciation and amortization.......... 4,712 4,857 3,366 29,149 42,084
-------- -------- -------- --------- ---------
Operating income (loss).............. 28,205 22,936 10,734 (57,444) 4,431
Other income (expense):
Interest expense..................... (91) (155) (79) (6,494) (6,819)
Loss on sale of operations, net...... -- -- -- (7,113) (7,113)
Other income (expense), net.......... 551 757 2,557 (27) 3,838
-------- -------- -------- --------- ---------
Total other income
(expense).................. 460 602 2,478 (13,634) (10,094)
-------- -------- -------- --------- ---------
Income (loss) from continuing
operations, before taxes............. $ 28,665 $ 23,538 $ 13,212 $ (71,078) $ (5,663)
======== ======== ======== ========= =========
2000
----------------------------------------------------------
BUSINESS BENEFITS & NATIONAL CORPORATE
SOLUTIONS INSURANCE PRACTICES AND OTHER TOTAL
--------- ---------- --------- --------- ---------
Revenue................................ $244,691 $157,879 $165,245 $ -- $ 567,815
Operating expenses..................... 215,620 126,600 158,294 9,515 510,029
-------- -------- -------- --------- ---------
Gross margin......................... 29,071 31,279 6,951 (9,515) 57,786
Corporate gen. and admin............... -- -- -- 24,694 24,694
Depreciation and amortization.......... 4,767 2,836 3,320 33,412 44,335
-------- -------- -------- --------- ---------
Operating income (loss).............. 24,304 28,443 3,631 (67,621) (11,243)
Other income (expense):
Interest expense..................... (329) (149) (138) (11,497) (12,113)
Goodwill impairment.................. -- -- -- (48,198) (48,198)
Loss on sale of operations, net...... -- -- -- (31,576) (31,576)
Other income (expense), net.......... 293 (1,098) 306 (7,010) (7,509)
-------- -------- -------- --------- ---------
Total other income
(expense).................. (36) (1,247) 168 (98,281) (99,396)
-------- -------- -------- --------- ---------
Income (loss) from continuing
operations, before taxes............. $ 24,268 $ 27,196 $ 3,799 $(165,902) $(110,639)
======== ======== ======== ========= =========
F-30
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1999
---------------------------------------------------------
CORPORATE
BUSINESS BENEFITS & NATIONAL AND
SOLUTIONS INSURANCE PRACTICES OTHER TOTAL
--------- ---------- --------- --------- --------
Revenue.................................. $217,975 $158,776 $169,642 $ -- $546,393
Operating expenses....................... 173,080 122,116 140,188 18,667 454,051
-------- -------- -------- -------- --------
Gross margin........................... 44,895 36,660 29,454 (18,667) 92,342
Corporate gen. and admin................. -- -- -- 19,138 19,138
Depreciation and amortization............ 3,580 2,863 2,663 14,364 23,470
Merger related cost...................... -- -- -- 5,789 5,789
-------- -------- -------- -------- --------
Operating Income (Loss)................ 41,315 33,797 26,791 (57,958) 43,945
Other income (expense):
Interest expense....................... (144) (640) (305) (5,513) (6,602)
Loss on sale of operations............. -- -- -- (7,067) (7,067)
Other (income) expense, net............ 617 584 1,301 (6,899) (4,397)
-------- -------- -------- -------- --------
Total other income (expense)... 473 (56) 996 (19,479) (18,066)
-------- -------- -------- -------- --------
Income (loss) from continuing operations,
before taxes........................... $ 41,788 $ 33,741 $ 27,787 $(77,437) $ 25,879
======== ======== ======== ======== ========
20. SUBSEQUENT EVENTS
CBIZ has divested several operations during 2002, in an effort to
rationalize the business and sharpen the focus on non-strategic businesses. In
accordance with this strategy, CBIZ may sell certain businesses to former
employees or shareholders. Management believes these transactions are priced at
market rates, competitively bid, and entered into at arm's length.
21. DISCONTINUED OPERATIONS
In April 1999, CBIZ 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.
The following information represents the required disclosures for the
Divested Entities at December 31, 1999 for the year then ended. Assets and
liabilities had been historically included in net assets of discontinued
F-31
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
operations in the Company's past balance sheets, and operating results are
included in income (loss) from operations of discontinued business in the
accompanying consolidated statements of operations.
Operating results of the discontinued segment were as follows (in
thousands):
1999
-------
Revenues:
Premiums earned........................................... $43,716
Net investment income..................................... 5,037
Net gain (loss) on investments............................ (13)
Other income.............................................. 124
-------
Total Revenues......................................... 48,864
Expenses:
Loss and loss adjustments................................. 28,644
Policy acquisition........................................ 16,728
Other, net................................................ 7,810
Depreciation and amortization............................. 346
-------
Total expenses......................................... 53,528
-------
Loss before taxes........................................... (4,664)
Income benefit.............................................. (1,068)
-------
Loss from discontinued operations........................... $(3,596)
=======
Loss on disposal, net of tax................................ $ (391)
=======
Net investment income was as follows (in thousands):
1999
------
Interest.................................................... $5,051
Dividends................................................... 327
------
Total investment income..................................... 5,378
Less: investment expense.................................... (341)
------
Net investment income.................................. $5,037
======
Realized losses on investments were are as follows (in thousands):
1999
----
Realized losses:
Available for sale:
Fixed maturities....................................... $ 13
Equity securities...................................... --
----
Total realized losses................................ $(13)
----
Net realized loss on investments............................ $(13)
====
F-32
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The change in net unrealized depreciation of investments is summarized as
follows:
1999
-------
Available for sale:
Fixed maturities.......................................... $(3,744)
Equity maturities......................................... (280)
-------
$(4,024)
=======
The components of unrealized depreciation on securities available for sale
at December 31, 1999 were as follows:
1999
-------
Gross unrealized depreciation............................... $(3,978)
Deferred income tax......................................... 1,352
-------
Net unrealized depreciation................................. $(2,626)
=======
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 were as follows (in thousands):
1999
-------
Holding losses arising during the period.................... $(4,037)
Reclassification adjustments for losses realized in net
income.................................................... 13
-------
Other comprehensive loss.................................. (4,024)
Income tax benefit........................................ (1,368)
-------
Other comprehensive loss, net of tax...................... $(2,656)
=======
DEFERRED POLICY ACQUISITION COSTS
At December 31, 1999 the changes in deferred policy acquisition costs were
as follows (in thousands):
1999
--------
Balance, beginning of year.................................. $ 5,746
Policy acquisition costs deferred........................... 15,518
Amortized expense during the year........................... (16,728)
--------
Balance, end of year........................................ $ 4,536
========
REINSURANCE
In the ordinary course of business, CBIZ assumed and ceded reinsurance with
other insurers and reinsurers. These arrangements provided 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.
F-33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The impact of reinsurance was as follows (in thousands):
1999
--------
Premiums written:
Direct.................................................... $ 69,507
Assumed................................................... 12,278
Ceded..................................................... (41,240)
--------
Net.................................................... $ 40,545
========
Premiums earned:
Direct.................................................... $ 63,873
Assumed................................................... 19,289
Ceded..................................................... (39,446)
--------
Net.................................................... $ 43,716
========
Losses and loss expense incurred:
Direct.................................................... $ 44,120
Assumed................................................... 17,920
Ceded..................................................... (33,396)
--------
Net.................................................... $ 28,644
========
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. CBIZ monitored concentrations of risks arising from similar
geographic regions or activities to minimize its exposure to significant losses
from catastrophic events.
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 CBIZ are domiciled. The RBC formula includes
components for asset risk, liability risk, interest rate exposure and other
factors. CBIZ's insurance subsidiaries exceeded all required RBC levels as of
December 31, 1999.
The Divested Entities statutory net income for the years ended December 31,
1999, was approximately $0.5 million. The statutory capital and surplus as of
December 31, 1999 was approximately $29.5 million.
F-34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------- ------------ ------------------------------------- ----------- ---------
ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING OF COSTS AND TO OTHER DEDUCTIONS/ AT END
PERIOD EXPENSES ACCOUNTS ACQUISITIONS RECOVERIES OF PERIOD
------------ ---------- --------- ------------ ----------- ---------
YEAR ENDED DECEMBER 31,
2001
Allowance deducted from
Assets to which they
apply:
Allowance for doubtful
accounts............... $22,156 $ 8,754 $(3,459) -- $(14,132) $13,319
======= ======= ======= ====== ======== =======
YEAR ENDED DECEMBER 31,
2000
Allowance deducted from
Assets to which they
apply:
Allowance for doubtful
accounts............... $13,272 $26,693 $ 3,042 -- $(20,851) $22,156
======= ======= ======= ====== ======== =======
YEAR ENDED DECEMBER 31,
1999
Allowance deducted from
Assets to which they
apply:
Allowance for doubtful
accounts............... $ 5,378 $ 9,831 $ 3,347 $1,116 $ (6,400) $13,272
======= ======= ======= ====== ======== =======
F-35
CENTURY BUSINESS SERVICES, INC.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
--------------------------------- ----------- ------------- -------- ------------ --------
FUTURE POLICY
DEFERRED BENEFITS, OTHER POLICY
POLICY LOSSES CLAIM CLAIMS AND
ACQUISITION AND LOSSES UNEARNED BENEFITS PREMIUM
SEGMENT COST EXPENSE PREMIUMS PAYABLES REVENUE
------- ----------- ------------- -------- ------------ --------
Year Ended:
December 31, 1999.............. $4,536 $84,520 $27,860 N/A $43,716
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
---------- ------------ ------------ --------- --------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER DIRECT
INVESTMENT LOSSES AND ACQUISITION OPERATING PREMIUMS
INCOME LOSS EXPENSE COSTS EXPENSES WRITTEN
---------- ------------ ------------ --------- --------
Year Ended:
December 31, 1999............. $5,037 $28,644 $16,728 $7,810 $69,507
F-36
CENTURY BUSINESS SERVICES, INC.
SCHEDULE IV -- REINSURANCE
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
------------------------------------- -------- --------- --------- ---------- ----------
PERCENTAGE
ASSUMED OF
CEDED TO FROM AMOUNT
GROSS OTHER OTHER ASSUMED
AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
-------- --------- --------- ---------- ----------
Year Ended:
December 31, 1999
Property -- Casualty Earned
Premiums........................... $63,873 $39,446 $19,289 $43,716 44.12%
F-37