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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
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 19961997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-25890
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
- --------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OHIO 44125
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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)
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is approximately $150,000,912 million$371,104,081 as of March 27, 1997.February 13, 1998. The number
of outstanding shares of the Registrant's common stock is 34,724,42847,406,738 shares as
of March 25 1997.February 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative to
the 19971998 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration statements.
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INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC.
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ANNUAL REPORT ON FORM 10-K
--------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------1997
TABLE OF CONTENTS
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PART I Page
PART I
Items 1 and 2. Business and Properties.......................................................... 2Properties................................................ 3
Item 3. Legal Proceedings................................................................ 15Proceedings...................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.............................. 17Holders.................... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............. 19Matters... 17
Item 6. Selected Consolidated and Combined Historical Financial Data..................... 20Data................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................... 21Operations........................................................ 19
Item 7A. Quantitative and Qualitative Information About Market Risk............. 26
Item 8. Financial Statements and Supplementary Data 27Data............................ 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 27Disclosure................................................. 26
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 27Registrant..................... 26
Item 11. Executive Compensation........................................................... 27Compensation................................................. 26
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 27Management......... 26
Item 13. Certain Relationships and Related Transactions...................................Transactions......................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................8-K........ 27
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THE FOLLOWING TEXT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K ("ANNUAL REPORT"). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN
THIS ANNUAL REPORT TO "IASI""CENTURY" OR THE "COMPANY" SHALL MEAN INTERNATIONAL ALLIANCECENTURY BUSINESS
SERVICES, INC., A DELAWARE CORPORATION, AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
IASICentury is a diversified services company which, acting through its
subsidiaries, provides outsourced business services, including specialty
insurance services, business outsourcingto small and medium sized commercial enterprises throughout
the United States.
The Company provides integrated services in the following areas: accounting
systems, advisory and environmental services.tax; employee benefits design and administration; human
resources; information technology systems; payroll; specialty insurance;
valuation; and workers' compensation. These services are provided through a
network of 82 Company offices in 26 states, as well as through its subsidiary
Comprehensive Business Services, Inc. ("Comprehensive"), a franchisor of
accounting services with approximately 250 franchisee offices located in 40
states. As of December 31, 1997, the Company served approximately 60,000
clients, of which approximately 24,000 were served through the Comprehensive
franchisee network. Management estimates that the Company's clients employ over
one million employees, including 240,000 employed by clients of the
Comprehensive franchisee network.
In October 1996, IASICentury completed two acquisitions (the "Merger
Transactions") pursuant to which it acquired, through a reverse merger, Century
Surety Company ("CSC") and its subsidiaries (together with CSC, the "CSC
Group"), which includes three insurance companies, and Commercial Surety Agency,
Inc. d/b/a Century Surety Underwriters ("CSU"), an insurance agency that markets
surety bonds.
Through its insurance subsidiaries,
IASI provides specialty insurance and bonding services to small and medium sized
commercial enterprises throughout the United States.
In December 1996, IASIthe Company acquired SMR & Co. Business Services ("SMR").
Through SMR, IASICentury provides a wide range of outsourced business outsourcing services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administration to individuals and small and medium sized
commercial enterprises primarily in Ohio. In February 1997, IASI signed a non-binding letter of intent and
confidentiality agreement (collectively, the "Letter of Intent")Pursuant to sell IASI's
environmental services operations. The Letter of Intent also contemplates the
formation of a strategic alliance between IASIredirection of
the Company initiated in November 1996, the Company began its acquisition
program to expand its operations rapidly in the outsourced business services
industry from its existing specialty insurance platform.
During 1997, the Company acquired the businesses of 39 companies
representing over $134 million in annualized revenues at the time of
acquisition. The majority of these acquisitions have been accounted for under
the purchase method of accounting. The Company anticipates future significant
acquisitions will be accounted for, when possible, under the pooling of
interests method of accounting. During 1997, the Company's acquisitions resulted
in significant increases in goodwill and other intangible assets, and the
purchaser whereby IASICompany anticipates that such increases will continue to have access to IASI's environmental resourcesas a result of future
acquisitions. The excess of cost over the fair value of net assets of businesses
acquired (goodwill), was approximately $89.856 million at December 31, 1997,
representing approximately 31% of the Company's total assets. The Company
amortizes goodwill on a straight-line basis over periods not exceeding 30 years.
The Company has completed from December 31, 1997 through February 17, 1998,
or has publicly announced as pending, an additional seven acquisitions
representing over $46 million in annualized revenues at the time of acquisition.
These acquisitions are not included in the results of operations for the benefit
of its insurance customers afterperiod
ended December 31, 1997. The Company believes that substantial additional
acquisition opportunities exist in the sale. IASI anticipates that the sale will
be completed by mid-1997. Consummation of the transaction remains subject to the
purchaser's due diligence, the negotiation and execution of definitive
documentation and the receipt of necessary governmental and third party
approvals and consents. Accordingly, there can be no assurance that the
transaction will be consummated. See "- Environmental Services - General."
IASI'soutsourced business services industry.
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The Company strategy is to grow aggressively grow as a diversified services
company by expanding its recently acquired outsourced business services and
specialty insurance and business
outsourcing services operations through internal growth and additional
acquisitions in such industries. See "-"-- Business Strategy."
IASICentury was formed as a Delaware corporation in 1987 under the name Stout
Environmental,Associates, Inc. ("Stout"). and primarily supplied hazardous waste services. In
1992, IASIthe Company was acquired by Republic Industries, Inc. (formerly known as Republic Waste Industries, Inc., "RII"("RII"). In April
1995, RII effected a spin-off of its hazardous waste operations through a
distribution of the common stock, $.01 par value per share ("Common Stock"), of
IASI to
the stockholders of record of RII (the "Spin-off"). In connection withAt such time, the Merger Transactions, in October 1996, IASI changed its name to International
Alliance Services, Inc. from RepublicCompany
was named "Republic Environmental Systems, Inc. IASI's Common
Stock trades" and was traded on the Nasdaq
National Market ("Nasdaq") under the symbol "RESI." On June 24, 1996, the Company began
trading under the symbol "IASI."IASI" in anticipation of the merger with Century
Surety Company and Commercial Surety Agency, Inc. which ultimately resulted in a
change of its name to "International Alliance Services, Inc." The name change
signaled a new direction for the Company away from its hazardous waste business.
In furtherance of its strategic redirection towards business services, the
Company successfully divested its hazardous waste operations in two separate
transactions completed in July and September 1997. On December 23, 1997, the
Company changed its name to Century Business Services, Inc. and began trading
under the symbol "CBIZ". See "-- Liquidity and Capital Resources." In June 1996,
IASIthe Company declared and distributed a two-for-one stock split in the form of a
100% stock dividend ("Stock Split"). All the share numbers and per share amounts
set forth herein reflect the Stock Split.
The principal executive office of IASICentury is located at 10055 Sweet Valley
Drive, Valley View, Ohio, 44125 and its telephone number is (216) 447-9000. In
March 1998, the Company's principal executive office will be relocated to 6480
Rockside Woods Blvd., South, Suite 330, Cleveland, Ohio 44131. Its telephone
number will remain the same.
BUSINESS STRATEGY
IASI'sCentury's business strategy is to expandgrow aggressively by expanding its
current operations in the outsourced business services and specialty insurance
areas, having discontinued and business outsourcing services areas, and discontinuedisposed of its operations in the environmental
servicesservice area. IASIThe Company plans to implement its business strategy through
internal growth and by acquiring and integrating existing businesses that
provide outsourced business services or specialty insurance services or business
outsourcing services.
IASIThe Company generally targets acquisitions in markets where it will be, or
the prospects are favorable to increase its market share to become, a
significant provider of a comprehensive range of outsourced business services
and specialty insurance and business
outsourcing services. IASI'sinsurance. Century's strategy is to acquire companies that (i)
have strong and energetic entrepreneurial leadership; (ii) have solid historic and
expected future internal growth; (iii) can add to the level and breadth of
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offered by IASICentury thereby enhancing IASI'sits competitive advantage over
other specialty insurance andoutsourced business outsourcing services providers; (iv) have a strong income stream;
and (v) have a strong potential for cross-selling among IASI'sthe Company's
subsidiaries. As opportunities are identified, within or outsideand tested against such criteria,
IASIthe Company may acquire specialty insurance andoutsourced business outsourcing
operationsproviders throughout the United
States.
IASIThe Company uses internal acquisition teams and its contacts in the
outsourced business services and specialty insurance and business outsourcing services industries to identify,
evaluate and acquire businesses in attractive markets. Acquisition candidates
are evaluated by IASI'sthe Company's internal acquisition teams based on a
comprehensive process which includes operational, legal and financial due
diligence reviews.
Although management believes that IASIthe Company currently has sufficient
resources, including cash on hand, cash flow from operating activities, credit
facilities and access to financial markets to fund current and planned
operations, service any outstanding debt and make certain acquisitions, there
can be no assurance that additional financing will be available on a timely
basis, if at all, or that it will be available on terms acceptable to IASI.the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations --- Liquidity and Capital Resources."
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ACQUISITIONS
RECENT ACQUISITIONSRecent Acquisitions
During 1997, the Company continued its strategic acquisition program,
purchasing the businesses of 39 complementary companies. These acquisitions
comprised the following: ten accounting systems and tax advisory businesses,
including Comprehensive, a franchisor of accounting services; eight specialty
insurance businesses; four workers' compensation administration businesses; ten
payroll administration/benefits design and administration firms; three human
resources/executive search firms; one valuation and appraisal group; two
technology firms; and one broker/dealer. The following are acquisitions completed since the consummationaggregate purchase price of the
Merger Transactionsaforementioned acquisitions was approximately $87.748 million, and includes
future contingent consideration of up to $5.880 million in October 1996:cash and 1,716,226
shares of restricted common stock, with an estimated stock value at date of
acquisition of $17.848 million, based on the acquired companies' ability to meet
certain performance goals. The aggregate purchase price, comprised of cash
payments, issuance of promissory notes, and issuance of Common Stock, has been
allocated to the net assets of the Company based upon their respective fair
market values. See Footnote 2 to the Consolidated and Combined Financial
Statements contained herein.
DIVESTITURES
In November 1996, IASI acquiredJuly 1997, the Company sold the majority of its environmental services
business, and in September 1997, sold its remaining environmental operations.
Taken together, these transactions for cash and notes resulted in a net loss of
$572,000. The Company's contingent liability is limited to $1.5 million in
connection with such divestitures. Management does not believe the Company will
experience a loss in connection with such contingencies.
In December 1997, the Company sold Environmental and Commercial Insurance
Agency, Inc. ("ECI"),and Environmental and Commercial Insurance Agency of LA, Inc. for
cash consideration resulting in a small, privately-held insurance agency, for $1.0 million
in cash and 192,500 sharesgain of Common Stock. ECI markets, through over 100
independent agents, property and casualty insurance surety bondsapproximately $171,000.
OUTSOURCED BUSINESS SERVICES
GENERAL
Through its business services subsidiaries, Century provides a wide range
of integrated business services to
environmental remediation contractors, landfill operators, consultants, and
other small and medium sized companies specializing in environmental businesses
throughout
the United States. It is the Company's goal to be the nation's leading provider
of outsourced business services to its target market. The Company's strategies
to achieve this goal include: (i) continuing to provide clients with a broad
range of high quality products and services, (ii) continuing to expand locally
through internal growth by increasing the number of clients it serves and
increasing the number of services it provides to existing clients, and (iii)
continuing to expand nationally through an aggressive acquisition program. The
following is a description of the outsourced business services currently offered
by the Company.
OPERATIONS
The Company provides integrated services in the following areas: accounting
systems, advisory and tax; employee benefits design and administration; human
resources; information technology systems; payroll; valuation; and workers'
compensation. These services are provided through a network of 82 Company
offices in 26 states, as well as through its subsidiary Comprehensive, a
franchisor of accounting services with approximately 250 franchisee offices
located in 40 states. As of December 31, 1997, the Company served approximately
60,000 clients, of which approximately 24,000 are served through the
Comprehensive franchisee network. Management estimates that its clients employ
over one million employees, including 240,000 employed by clients of the
Comprehensive franchisee network.
The Company's clients typically have fewer than 500 employees, and prefer
to focus their resources on operational competencies while allowing Century to
provide non-core administrative functions. In December 1996, IASI completedmany instances, outsourcing
administrative functions allows clients to enhance productivity, reduce costs,
and improve service, quality and efficiency. Depending on a client's size and
capabilities, it may choose to utilize all or a
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portion of the acquisitionCompany's broad array of services, which it typically accesses
through a single Company representative.
ACCOUNTING SYSTEMS, ADVISORY AND TAX SERVICES. The Company offers tax
planning and preparation, cash flow management, strategic planning, consulting
services for outsourced departments, and recordkeeping assistance. In addition
to federal, state and local tax return preparation, the Company provides tax
projections based on financial and investment alternatives and assists in
appropriate tax structuring of business transactions such as mergers and
acquisitions. The Company offers quarterly and year-end payroll tax reporting,
corporate, partnership and fiduciary tax planning and return preparation. In
addition, the Company offers small and medium sized businesses the opportunity
to outsource their back-office functions. The Company also offers financial
planning services to individuals, including investment counseling, personal
financial statements, mortgage and investment analysis, succession planning,
retirement planning and estate planning. In addition, the Company offers
profitability, operational and efficiency enhancement consulting to a number of
specialized industries.
EMPLOYEE BENEFITS DESIGN AND ADMINISTRATION. The Company offers
comprehensive employee benefits consulting services. These include the design,
implementation and administration of 401(k) plans, profit sharing plans, defined
benefit plans, money purchase plans and actuarial services. The Company also
assists in the choice of health and welfare benefits such as group health
insurance plans, dental and vision care programs, group life insurance programs,
accidental death and dismemberment or disability programs, voluntary insurance
programs, health care and dependent care spending accounts and premium
reimbursement plans. In addition, the Company offers communications services to
inform and educate employees about their benefit programs. The Company also
offers executive benefits consulting on non-qualified retirement plans and
business continuation plans. Moreover, one of the Company's subsidiaries offers
Registered Investment Advisory Services, including Investment Policy Statements
(IPS), mutual fund selection based on IPS and ongoing mutual fund monitoring.
HUMAN RESOURCES SERVICES. The Company offers executive search and
placement, outplacement, organizational and management training and development,
personnel records and employment process administration, regulatory compliance
training, employment relations audits, organizational structure and executive
compensation analyses, opinion surveys, and supervisory training. The Company
expects to provide additional services, including pre-employment screening,
specialized systems such as applicant skill evaluations, customer contact
monitoring, and employee assessment and selection. The Company can assist with
the implementation of programs to strengthen both the financial and human
resources sides of the client's business. The Company has developed detailed
personnel guides, which set forth a systematic approach to administering
personnel policies and practices, including recruiting, discipline and
termination procedures. In addition, the Company will review and revise, if
necessary, personnel policies and employee handbooks or will create customized
handbooks for its clients.
INFORMATION TECHNOLOGY CONSULTING SERVICES. The Company offers a wide
range of information technology services, from creating strategic technology
plans to developing and implementing software and hardware solutions.
Specifically, the Company provides strategic technology planning, project
management, development of Internet/Intranet applications including Internet
security, custom software development, design and implementation of both wide
access network ("WAN") and local access network ("LAN") networks, and accounting
software selection and implementation. The Company utilizes a methodology, in
which business needs drive technology, ensuring appropriate technical solutions
for the Company's small and medium sized information technology clients.
PAYROLL SERVICES. The Company processes time and attendance data to
calculate and produce employee paychecks, direct deposits and reports for its
clients. The Company delivers the paychecks and reports to clients within 24 to
48 hours of the Company's receipt of the data electronically submitted from the
client. The Company's system is highly configurable to meet the specialized
needs of each client yet maintains the ability to provide high volume
processing. The system integrates easily with the client's general ledger, human
resources and time and attendance systems. In addition, the Company offers many
sophisticated features, including the automatic enrollment and tracking of paid
time off, proration of compensation for new hires, integrated garnishment
processing, escrow services and funds administration services. The Company
assumes responsibility for payroll and attendant recordkeeping, payroll tax
deposits, payroll tax reporting, and all federal, state, county
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and city payroll tax reports (including 941s, 940s, W-2s, W-3s, W-4s and W-5s),
state unemployment taxes, employee file maintenance, unemployment claims and
monitoring and responding to changing regulatory requirements. The Company will
also represent the client before tax authorities in any payroll tax dispute or
inquiry.
SPECIALTY INSURANCE SERVICES. See the description in "Specialty Insurance
Services".
VALUATION SERVICES. The Company offers appraisal and valuations of
commercial tangible and intangible assets and valuation of financial securities.
The Company conducts real estate valuations for financing feasibility studies,
marketability and market value studies and performs business enterprise and
capital stock valuations for mergers and acquisitions, estate planning, employee
stock ownership trusts, sale, purchase or litigation purposes. The Company
assists in asset allocation issues, fixed asset insurance matters, fixed asset
tracking, specialized valuation consulting, investment transfer planning and
other valuation services.
WORKERS' COMPENSATION SERVICES. Each state requires employers to provide
workers' compensation coverage for employees. The Company's services vary from
state to state; however, it generally provides employers with an integrated
system of actuarial analysis and underwriting capabilities with claims
administration and has the capability to market workers' compensation products
in three states. Professional administration can offer clients sizable savings
by controlling the costs of premiums, claims and risks. Services include:
deductible programs available to further reduce costs, claims preparation and
filing, expert claims management and loss control, medical referral network for
employees, multi-state coverages, Occupational Safety and Health Administration
("OSHA") compliance and record keeping, OSHA 200 logs preparation, certificates
of insurance, loss prevention strategies, free fraud investigation, safety
program development consultation, workers' compensation audits and
classification analysis for compliance.
SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
The Company's key competitive factors in obtaining clients for business
services are a strong existing sales network and marketing program, established
relationships and the ability to match client requirements with available
services and products at competitive prices. The Company believes that by
retaining the identity of its acquired companies, it will be able to maximize
its market penetration by combining a local entrepreneurial brand name with the
name and resources of a national company. The Company expects that as it expands
through internal growth and acquisitions, it will be able to take advantage of
economies of scale in purchasing a range of services and products and to
cross-market new products and services to existing clients who do not currently
utilize all of the outstanding sharesservices the Company offers. The Company provides its
services and products through a network of SMR82 Company offices in exchange26 states, as
well as through its subsidiary Comprehensive, a franchisor of accounting
services with approximately 250 franchisee offices located in 40 states.
In addition to the Company's traditional operations, the Company intends to
utilize its Comprehensive network of approximately 250 entrepreneurial
franchisee sales offices to distribute its services and products to the
Comprehensive network's approximately 24,000 customers just as it utilizes its
own offices. The franchisees are able to market to their customers the broad
array of services and products offered by Century. In the process, the
franchisees have the opportunity to enhance customer loyalty, receive
compensation for 600,000 shares of Common Stockadditional sales and warrantsprovide additional revenue to purchase an additional 900,000 shares of Common Stock at an exercise
price of $10.375 per share.
In January 1997, IASI acquired certainboth the
Century subsidiary providing the service or product and to Comprehensive as the
franchisor.
None of the assetsCompany's major business services groups have a single
homogeneous client base. Rather, the Company's clients come from a large variety
of industries and markets. The Company believes that such diversity helps to
insulate it from a downturn in a particular industry. In addition, Century's
clients are focused on quality and quantity of services and established
relationships and are not overly sensitive to price change. Nevertheless,
economic conditions among selected clients and groups of clients may have a
temporary impact on the demand for such services.
COMPETITION
The outsourced business services industry is a highly fragmented and
competitive industry, with a majority of Midwest Indemnity Corporation ("Midwest"),industry participants (such as
accounting, employee benefits, payroll firms or PEOs) offering only one or a
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limited number of services. Competition is based primarily on customer
relationships, range and quality of services or product offerings, customer
service, timeliness and geographic proximity. There are limited barriers to
entry and new competitors frequently enter the market in exchangeany one of the
Company's many service areas. The Company competes with a small number of
multi-location regional or national operators and a large number of relatively
small independent operators in local markets. Some of these competitors, which
include public companies, may have greater financial resources than the Company.
The Company may also face competition for $3.3 millionacquisition candidates from these
companies, many of who have acquired a number of various types of business
service providers in cash,
407,256 sharesrecent years.
The Company believes that it will be able to compete effectively based on
its (i) broad range of Common Stockhigh quality services and $1.8 millionproducts, (ii) knowledgeable
and trained personnel, (iii) entrepreneurial culture, (iv) large number of
locations, (v) diversity of geographic coverage, (vi) operational economies of
scale and (vii) decentralized operating structure.
The Company's competitors in non-interest bearing notes
payable in installments through December 31, 1998. Midwest markets environmentalthe business outsourcing services industry
include independent consulting services companies, divisions of diversified
enterprises and surety bond products throughoutbanks.
REGULATION
The Company's outsourced business services are vulnerable to legislative
law changes with respect to the United States through a systemprovision of approximately 100 independent agentspayroll, employee benefits and
subagents.
In February 1997, IASI acquired Midland Consultants, Inc., a
full-service specialized employment firm, in exchange for $208,000 in cash,
87,500 shares of Common Stockpension plan administration, tax accounting and warrants to purchase an additional 20,000
shares of Common Stock at an exercise price of $11.625 per share.
In March 1997, IASI acquired M&N Risk Management, Inc., M&N
Enterprises, Inc. and Millisor Firmco, Inc. (collectively, the "M&N Companies")
for $1.0 million in cash, 384,600 shares of Common Stock and warrants to
purchase an additional 900,000 shares of Common Stock at an exercise price of
$13.00 per share. The M&N Companies provide third party workers' compensation design and
administration services. PENDING ACQUISITIONS
In March 1997, IASI announcedLegislative changes may expand or contract the contemplated acquisitiontypes
and amounts of all ofbusiness services that are required by individuals and
businesses. There can be no assurance that future laws will provide the outstanding capital stock of The Benefits Group Agency, Inc, a full-service
corporate benefits administration company. ("The Benefits Group"), for $2.5
million in cash, 395,000 shares of Common Stocksame or
similar opportunities to provide business consulting and warrantsmanagement services to
purchase an
additional 500,000 shares of Common Stock at an exercise price of $12.50 per
share.individuals and businesses that are provided today by existing laws.
SPECIALTY INSURANCE SERVICES
GENERAL
Through its insurance subsidiaries, IASICentury provides specialty insurance,
and bonding services and workers' compensation coverage to small and medium sized
commercial enterprisescompanies throughout the United States. The following is a description of the
specialty insurance, and
bonding services and workers' compensation programs
currently offered by IASI.
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OPERATIONS
The products provided by IASI'sCentury's insurance subsidiaries can be divided
into two categories:three categories of specialty insurance services: commercial liability
lines, which constitutesconstitute approximately 85%84.0% of IASI'sthe Company's specialty insurance
business, andbusiness; surety bonds, which constitute 13.5%; and workers' compensation
coverage, which constitutes 2.5% of the other 15% of IASI'sCompany's specialty insurance business.
In addition, IASICentury employs reinsurance to limit its exposure on policies and
bonds that it has written.bonds.
COMMERCIAL LINES. IASI'sCentury's commercial product lines operations consist of
approximately 40 different programs for a wide variety of specialty risk groups.
Largest among these are general liability insurance and related coverages for
(i) small construction contractors; (ii) restaurants, bars, and taverns; (iii)
small commercial and retail establishments; and (iv) sun tanning salons; and environmental contractors and
professionals.
Insurance coverages offered to environmental contractors and
professionals, include (i) property and general liability insurance for
remediation action contractors engaged in a full hazard range of clean-ups;
asbestos abatement contractors; underground storage tank removal and remediation
contractors; and solid waste landfill operators; and (ii) errors and omissions
insurance for environmental consultants. In addition IASI conducts a
comprehensive inspection of environmental risks which management believes
enhances its position as a provider of environmental insurance.
IASI'ssalons.
Century's commercial lines business is produced by a network of
approximately 72 agents (with 104 offices) and 28 brokers (with 28 offices).
Subject to strict and detailed written underwriting guidelines regarding pricing
and coverage limitations published by IASI,Century, agents have limited authority to
bind coverage. For casualty coverage, agents may bind and write up to $1.0
million combined single limit of liability for risks other than those on the
list of prohibited classes or on the list for referral to IASI.Century. Policies that
are bound by agents are immediately forwarded to IASICentury for review and
inspection, and IASICentury reserves the right to make the final underwriting
decision based on IASI'sits acceptance or rejection of individual risks. Risks outside
the written guidelines must be submitted to IASICentury for specific approval for
underwriting. Brokers have no underwriting authority and must submit all risks
to IASICentury for underwriting, quoting, binding and policy insurance.
IASI8
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Century checks premium ratings on a selective basis to verify that program
rules and rates are being followed. In addition, underwriters perform monthly
reviews of files for renewal risks. Files are reviewed on a selective basis by
policy types,type, particular risk classes,class, or individual general agentsagent as loss
experience or changing underwriting practices dictate. In addition to other
underwriting quality control measures, a continuous audit process for each
general agent is maintained. At least once a year, a visit to each agent's
office is arranged to review all of the foregoing areas, as well as premium
production, losses and loss ratio. Management also performs internal
underwriting audits of all underwriters on a regular basis to maintain control
of the Company's underwriting quality and pricing of IASI.pricing.
All claims against commercial policies are managed by IASI'sCentury's claim
departments. Outside adjusters and attorneys are engaged, as necessary, to
supplement IASI'sthe Company's in-house staff and to represent IASIthe Company in
litigation over disputed claims. Claims guidelines are in place on all programs.
State regulations and data on unfair claims practices are also provided to the
staff members as necessary and appropriate. IASI'sCentury's philosophy is to pay valid
claims as expeditiously as possible but to resist firmly what management
believes are unjust and fraudulent claims. In an effort to provide adequate
resources to the claims staff, CSC became a member of the Property Loss Research
Bureau and the Liability Insurance Research Bureau in 1995. IASICentury also submits
claim data to the index bureaus of the American Services Insurance Group and the
Property Insurance Loss Register.
It is the responsibility of the claims manager to appoint outside adjusting
firms to work on behalf of IASI.the Company. These firms, however, are given no
authority to settle any claims without IASI'sCentury's prior agreement. The internal
adjuster assigned to each individual claim determines, after coverage is
analyzed, whether the claim can be handled in house or should be assigned to an
outside firm.
SURETY BONDING. IASI'sCentury's surety bonding operations consist of two major
programs: contract surety bonds for smaller construction contractors (with work programs
typically ranging from $250,000 to $10.0 million per year) and bonds for the
solid waste industry, including waste haulers and landfill operators. The
Company also writes a small number of bail bonds.
Contract surety consists of bonds that government authorities and some
private entities require construction contractors to post to provide assurance
that contract work will be performed timely, to specification, on budget, and
without encumbrance from suppliers or subcontractors who may have lien rights
for non-payment. Contract surety business is underwritten by IASICentury subject to
authority defined in agency agreements with the insurance companies. The
business is produced by approximately 100 appointed agents, who have limited
authority to bind the companiesCentury's insurance subsidiaries in accordance with specific
guidelines established by IASI.Century. Because the contract surety business is
specialized in smaller, newer and more difficult accounts, underwriters take
collateral, require contract funds control, and take other risk control measures
considered extraordinary by standard market sureties. In virtually all cases,
bond principals indemnify the surety against loss with their personal as well as
corporate assets.
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6
Once bonds are issued, IASIthe Company continues to review all projects to
determine job progress, bill payment, and other factors. IASICentury maintains
real-time records of all bonded exposures, amended as appropriate, in an effort
to obtain the most current possible assessment of exposures for each account and
to avoid excessive exposure on any one account. IASICentury also strives through its
review procedures to provide the companiesCentury's insurance subsidiaries with the earliest
possible notice of potential difficulty so that claim resources can be brought
to bear at the earliest possible stage in an effort to mitigate losses.
While claims against surety bonds are managed by IASI,the Company, outside
counsel are engaged to handle surety defense litigation. In addition, IASICentury
has or has access to completion capability for finishing bonded
work which bonded principals are unable to prosecute,complete, and pursues recoveries on
behalf of the
companiesCentury's insurance subsidiaries from principals who have defaulted on
bond obligations. Such recovery efforts range from execution on collateral
posted by bonded principals to indemnity litigation to recover surety losses
from indemnitors' business and personal assets.
Finally, IASI manages funds control escrow accounts as
specified by the underwriters for particular accounts.
IASI'sThe Company's solid waste bond program, which is national in scope, is
primarily written directly by IASI,Century, and serves bond accounts that are
generally much larger than those handled by IASI'sCentury's contract surety program.
The primary focus of this program is bonds for landfill closure and post-closure
care required by states
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10
in accordance with Subtitle D of the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"). These bonds are designed to assure that non-hazardous
solid waste landfills will be closed when their useable airspace is exhausted in
accordance with Subtitle DRCRA closure requirements (or such higher standards as
individual states may impose) and that the sites will be maintained in
accordance with Subtitle DRCRA standards for a period of at least 30 years after closure.
Management believes that this program is one of only a few landfill bond
programs in the United States, although bank letters of credit and other devices
may be used to satisfy Subtitle DRCRA financial assurance requirements. Full implementation of RCRA financial assurance requirements by
the United States Environmental Protection Agency (the "EPA") is not currently
scheduled until after April 1997, although several states have already proceeded
with such implementation, including, most significantly for IASI, Ohio, Kentucky
and Pennsylvania. See "-"--
Regulation." IASIThe Company currently writes landfill bonds for some of the larger
solid waste disposal firms in the country. As a companion to the landfill
closure bonds, IASICentury also writes bonds required of waste haulers to assure the
observance of terms of their contracts with the local communities from which
they collect waste.
To stay abreast of technical and market developments in the surety
industry, certain of IASI'sCentury's subsidiaries are members of the Surety
Association of America, the National Association of Independent Sureties,
National Association of Surety Bond Producers, the Surety Federation of Ohio,
and Thethe American Surety Association, on which Board of Directors CSC occupies a
position.
WORKERS' COMPENSATION SERVICES. Each state requires employers to provide
workers' compensation coverage for employees. The Company's workers'
compensation program includes fully issued workers' compensation coverage as
well as other services. The Company's services vary from state to state;
however, it generally provides employers with an integrated system of actuarial
analysis and underwriting capabilities with claims administration. Century has
the capability to market workers' compensation products in three states.
Professional administration can offer clients sizable savings by controlling the
costs of premiums, claims and risks. Services include: deductible programs
available to further reduce costs, claims preparation and filing, expert claims
management and loss control, medical referral network for employees, multi-state
coverages, OSHA compliance and record keeping, OSHA 200 logs preparation,
certificates of insurance, loss prevention strategies, free fraud investigation,
safety program development consultation, workers' compensation audits and
classification analysis for compliance.
REINSURANCE. IASICentury employs reinsurance to limit its exposure on the
policies and bonds it has written. IASIThe Company utilizes several different
reinsurance programs to cover its exposure, including "treaties" that cover all
business in a defined class and "facultative" reinsurance that covers individual
risks. IASIThe Company generally retains from $50,000 to $200,000 of each commercial
line anticipated risk, depending on the program. Surety retentions may go as
high as $1.0 million or more, but typically are less than $250,000.
Numerous domestic and international reinsurers support these various
programs in different combinations. Generally, IASI'sthe Company's reinsurers are
rated A- or better by A.M. Best, a leading rating agency of insurance companies
and reinsurers, and demonstrate capital and surplus in excess of $80.0 million
(collectively in excess of $10.0 billion). Cessions are diversified so that
every reinsurance treaty (i.e., excluding facultative arrangements) is supported
by more than one reinsurer and no reinsurer is participating in all of IASI'sCentury's
reinsurance programs.
MARKETING
IASI'sOther than the workers' compensation program, Century's insurance and
bonding business is focused on niche insurance and surety coverages known in the
insurance business as "non-standard" or specialty coverages. These terms refer
to risks regarded as higher than standard or normal risks and to risk groups
regarded as too small or too specialized to permit profitable underwriting by
larger, "standard market" insurance companies. In general, non-standard
insurance and bonds are more expensive, and coverage more limited, because of
perceived additional risk associated with this type of business. IASICentury
attempts to identify and exploit such niches in the non-standard insurance
market where management believes the actual risk is significantly less than the
perceived risk at which the coverage is defined and priced, or where IASI, becausethe Company
(because of its smaller size and lower overhead,overhead) is able to underwrite coverages
more economically than larger carriers.
Many non-standard insurance products can be marketed on an excess and
surplus lines basis, which means that the carrier is not fully admitted in a
given state but instead satisfies a less restrictive threshold of regulatory
scrutiny, known as "eligibility," to write excess and surplus lines ("E&S"). E&S
eligibility offers much more
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11
flexibility than admitted carriers enjoy. For example, E&S eligibility offers
certain marketing advantages, principally exemption from rate and form filing
requirements that apply to admitted carriers, which permits E&S carriers to
adjust prices and coverages more quickly than admitted carriers, or to cease
writing altogether. Accordingly, the majority of the non-surety business of IASIthe
Company is written on an
5
7 E&S basis. Through certain of its subsidiaries, IASICentury
is admitted in 3436 states, but is eligible to write on an E&S basis in 39 other40 states
plus the District of Columbia, the most significant of such states being
California, Texas and Florida.
Certain commercial lines products, however, are virtually impossible to
write on an E&S basis because ofWhere competitive or regulatory requirements tonecessitate the use of
admitted carriers. In order to market these programs, IASIcarriers, Century uses its admitted subsidiaries, thereby reaching a
market of 3036 states. Management believes that this strategy of employing both
admitted and non-admitted E&S carriers helps to maximize IASI'sthe Company's
flexibility within the insurance regulatory environment in an effort to market a
broad range of products on a profitable basis. IASICentury also employs reinsurance
arrangements to market certain products in all 50 states.
POTENTIAL COMPETITION
Both the commercial lines and the surety industries have been highly
competitive in recent years, resulting in the consolidation of some of the
industries' largest companies. Competition is particularly acute for smaller,
specialty carriers like IASICentury because the market niches exploited by IASICentury
are small and can be penetrated by a large carrier that elects to cut prices or
expand coverage. IASIThe Company has endured this risk historically by maintaining a
high level of development of new products, such as its environmental coverage and
landfill bonds eschewed by most major carriers.
Nevertheless, there can be no
assurance that future development efforts will succeed or that product erosion
from intensifying competition will not outpace development efforts.
CUSTOMERS
IASICentury provides specialty insurance services to approximately 6,000
clients through a network of nearly 200 agents. IASIThe Company attempts to maintain
diversity within its client base to lower its exposure to downturns or
volatility in any particular industry and help insulate IASIthe Company to some
extent from general economic cyclicality. All prospective customers are
evaluated individually on the basis of insurability, financial stability and
operating history. No customer individually comprises more than 3.5%3.0% of the
total consolidated revenue of IASI.the Company.
REGULATION
FEDERAL REGULATION. IASI'sCentury's specialty insurance operations are
vulnerable to both judicial and legislative law changes. Judicial expansion of
terms of coverage can increase risk coverage beyond levels contemplated in the
underwriting and pricing process. According to industry estimates reported by
A.M. Best, judicial imposition of pollution liability on insurers before the era
of specific pollution exclusions in insurance policies created an estimated $25
billion liability for U.S. insurers and reinsurers that such companies did not
know they were underwriting and for which they received no premium.
At the same time, coverages that are established by statute may be
adversely affected by legislative or administrative changes of law. Most surety
bonds exist because they are required by government agencies. When governments
change the threshold for requiring surety, the market for surety bonds is
directly affected.
The repeated postponementApproval by the EPA of deadlines for
compliance with the financial assurance portions of RCRA Subtitle D has
significantly slowed growth of IASI's landfill closure bond program, which was
begun in March 1994 becauseU.S. Department of the anticipated deadlineTreasury ("Treasury") and Treasury
listing as an approved surety is required for the Company's Surety Bond Program.
Century Surety Company and Evergreen National Indemnity Company ("Evergreen")
are currently approved and listed "Companies Holding Certificates of April 1994 for
universal compliance. Such compliance currently is not anticipated to be
universally mandated until after AprilAuthority
as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies"
by the Treasury Department Circular 570, effective July 1, 1997.
STATE REGULATION. The companies of the CSC Group are subject to regulation
and supervision by state insurance regulatory agencies, applicable
generally toauthorities, most comprehensively
for each insurance company in its state of incorporation.incorporation, but also in other
states where the Companies are admitted or eligible to write E & S lines. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition --- Sources of Cash." These regulatory bodies have broad administrative
powers relating to (i) standards of solvency, which must be met on a continuing
basis; (ii) granting and revoking of licenses; (iii) licensing of agents; (iv)
approval of policy rates and forms; (v) maintenance of adequate reserves; (vi)
form and content of financial statements; (vii) types of investments permitted;
(viii) issuance and sale of stock; and (ix) other matters pertaining to
insurance. See Footnote 9 to the Consolidated and Combined Financial Statements
contained herein.
Each of the CSC Group companies areis required to file detailed annual
statements with the respectiveapplicable state regulatory bodies and areis subject to
periodic examination by the regulators. The most recent regulatory
examination11
12
examinations for CSC wasand Evergreen were made as of December 31, 1993. Regulatory
review by the Ohio Department of Insurance for each of CSC and Evergreen for the
year ended December 31, 1996 is currently in progress. The most recent triennial
regulatory examinationsexamination of each of Evergreen National Indemnity Company ("Evergreen") and Continental Heritage Insurance Company ("Continental
Heritage"), each
subsidiariesa subsidiary of IASI, were madeCSC, by the Utah Department of Insurance was as of
December 31, 1993 and December 31, 1994.
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8
BUSINESS OUTSOURCING SERVICES
GENERAL
Through its subsidiary, SMR, IASI provides a wide range of business
outsourcing services. It is IASI's goal to expand the business outsourcing
services offered by IASI into a comprehensive personnel, consulting and
management system that enables IASI to assist its clients with substantially all
business outsourcing matters. The following is a description of the business
outsourcing services currently offered by IASI.
OPERATIONS
IASI provides a comprehensive range of business outsourcing services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administration services to individuals and small and medium
sized commercial enterprises engaged in a wide variety of businesses. IASI
contracts with its clients based upon the services they require.
INFORMATION TECHNOLOGY CONSULTING. IASI provides a wide range of
information technology services. Such services include developing strategic
technology plans, determining emerging technology capabilities (such as imaging
and the Internet), reviewing operational use of software and hardware, defining
and implementing software and hardware systems to address day-to-day business
challenges and designing and implementing network solutions for clients with
multiple sites.
TAX RETURN PREPARATION AND COMPLIANCE; TAX PLANNING. IASI's tax return
preparation and compliance services include the preparation and review of
federal and state tax returns on behalf of IASI clients. In addition, IASI
offers tax planning services to businesses with the goal of reducing the
client's tax liabilities. Such services include assistance with the choice of
business entity, development of executive compensation plans and employee
benefit and retirement policies, and evaluation of investments.
BUSINESS VALUATION. IASI's business valuation services are designed to
assist a client in determining the precise value of a business or professional
practice, either to avoid tax and regulatory problems or simply to facilitate
organizational change. Such services are required in a variety of contexts,
including litigation, sales, employee stock ownership plans, corporate
recapitalization, succession plans or acquisitions.
Business valuation involves a formalized system of gathering
information to gain an in-depth understanding of a client's business and the
pertinent factors affecting its value. IASI employs a team of Certified
Valuation Analysts to perform such analyses.
HUMAN RESOURCE MANAGEMENT. As part of its human resource management
services, IASI performs organizational development audits and analyses and
organizational structure analyses to provide its clients with solutions to
strengthen both the financial and human resource side of the clients'
businesses. IASI then works with its clients to implement such solutions.
Included in the services provided by IASI is the development of
detailed personnel guides, which set forth a systematic approach to
administering personnel policies and practices including recruiting, discipline
and termination procedures. In addition, IASI will review and revise, if
necessary, personnel policies and employee handbooks or will create customized
handbooks for its clients.
IASI's human resource management services include the recruiting of new
employees. IASI will also perform executive compensation analyses and provide
management with detailed information regarding competitive salaries for a wide
variety of positions throughout the United States.
SUCCESSION AND ESTATE PLANNING. IASI provides business and estate
planning services, as well as assists in the review of estate planning
documents. Such services include the review and analysis of the laws affecting,
and the development of customized plans regarding, the management and succession
of businesses and estates.
PERSONAL FINANCIAL PLANNING. IASI offers financial planning services to
individuals. IASI employs tax and financial planners who assess the individual's
cash flow and tax situation, financial requirements and financial objectives,
and work with the individual to define his or her short and long term financial
goals. IASI's financial planners then work with the individual to develop and
implement plans and methods for achieving the individual's goals.
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9
EMPLOYEE BENEFIT PROGRAM DESIGN AND ADMINISTRATION. IASI currently
offers small group health care plans and other insurance coverages that its
clients may provide to their employees. Such insurance coverages include group
term life, universal life, accidental death and dismemberment and long-term
disability. IASI works with the client to determine its needs and, in accordance
with such needs, gives the client the opportunity to select from among several
different plan packages or, with the assistance of IASI, design a personalized
package of benefits for the client.
As part of its services, IASI administers the foregoing benefit plans
and is responsible for negotiating the benefits and costs of such plans. IASI
serves as a liaison for the delivery of such services to its client's employees
and monitors and reviews claims for loss control purposes.
In addition, IASI offers to its clients 401(k), profit-sharing, defined
benefit and money purchase plans, as well as administration and consulting
services associated with such plans. IASI also provides support services to
insurance companies who offer retirement plans.
IASI's QuickVal Daily Valuation System ("QuickVal") provides 24-hour
telephone access to qualified retirement plan administration information for
individual participants. QuickVal provides participants with their account
balances and enables participants to change investments at any time.
OTHER BUSINESS OUTSOURCING SERVICES. In addition to the business
outsourcing services described above, IASI also provides the following business
outsourcing services: merger and acquisition analysis; litigation support; cash
flow management; process improvement consulting, including quality management
and strategic services; business management consulting, including communications
consulting, market research and organizational development; and bookkeeping
services.
MARKETING AND CUSTOMERS
IASI's business outsourcing services are sold primarily in Ohio. All
services use common marketing techniques, including direct sales methodologies
with emphasis on referral sources.
None of IASI's major business outsourcing services groups have a single
homogeneous client base. Rather, IASI's clients come from a large variety of
industries and markets. IASI believes that such diversity helps to insulate IASI
from a downturn in a particular industry. In addition, none of IASI's business
outsourcing services are overly sensitive to price change. Nevertheless,
economic conditions among selected clients and groups of clients may have a
temporary impact on the demand for such services.
COMPETITION
The business outsourcing services industry has been highly competitive
in recent years resulting in consolidation and strategic alliances across
industry lines. The principal competitive factors in this industry are service
and price. This is particularly important to small to medium sized providers
because larger providers, or alliances with larger providers, can create service
and price distortions in the market place.
IASI's competitors in the business outsourcing services industry
include independent consulting services companies, divisions of diversified
enterprises and banks.
REGULATION
IASI's provision of business outsourcing services is vulnerable to
legislative changes with respect to its tax advisory, compliance and preparation
services. Legislative changes may expand or contract the types and amounts of
business services that individuals and businesses require.
ENVIRONMENTAL SERVICES
GENERAL
In February,July, 1997, IASI signed the non-binding Letter of Intent to sell
IASI's environmental services operations. The Letter of Intent also contemplatesCompany sold the formation of a strategic alliance between IASI and the purchaser whereby
IASI will continue to have access to IASI's environmental resources for the
benefit of its insurance customers after the sale. IASI anticipates that the
sale will be completed by mid-1997. Consummation of the transaction remains
subject to the purchaser's due diligence review, the negotiation and execution
of definitive documentation and the receipt of necessary government and third
party approvals and consents. Accordingly, there can be no assurance, however,
that the transaction will be consummated or, if consummated, that the
transaction will be consummated on the terms set forth herein.
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The following is a description of IASI's environmental services
business as of the date of this Annual Report.
OPERATIONS
IASI's environmental services operations include the operation of its
treatment, storage and disposal facilities ("TSD Facilities"), transportation,
remediation and technical services and related engineering, consulting and
analytical services. IASI currently operates seven hazardous and non-hazardous
TSD Facilities located in the United States and Canada. These TSD Facilities are
serviced by IASI's integrated trucking operations. IASI does not own any
hazardous waste disposal sites. IASI also provides a broad range of related
environmental services including engineering, consulting and analysis,
remediation, groundwater/wastewater services and other technical services.
TSD FACILITIES. IASI provides hazardous and non-hazardous waste
treatment, storage and disposal services through seven commercial hazardous TSD
Facilities located in the United States and Canada. The wastes handled by these
TSD Facilities include substances which are classified as hazardous under
applicable law because of their source of generation, characteristic properties,
specific constituents and other substances subject to federal, provincial and
state environmental regulations.
Treatment, storage and disposal services are typically performed under
service agreements that obligate IASI to accept from its customer waste material
conforming to the specifications set forth in the services agreement. Before
IASI signs a service agreement with a customer, a representative sample of the
waste is analyzed by a laboratory to enable IASI to recommend the best method of
transportation, treatment and disposal. Prior to unloading at IASI's treatment
facility, a representative sample of the delivered waste is tested and analyzed
on site to ensure that it conforms to the customer's waste profile sheet. Once
the wastes are characterized, compatible groups are consolidated to achieve
economies in storage, handling, transportation and ultimate treatment and
disposal.
The operational and permitted capabilities of the seven TSD Facilities
operated by IASI vary extensively with each facility operating under site
specific permit requirements. The seven TSD Facilities in the aggregate have the
ability to process bulk liquids, solids, drums and laboratory-packaged waste
materials. Six of these TSD Facilities have received final hazardous waste
permits (EPA and/or state-issued Part B Permits or Canadian Ministry of the
Environment ("MOE") Permits) from the appropriate regulatory agencies and the
remaining TSD Facility is operating under an interim status permit. See "-
Regulation." IASI expects to obtain the final Part B permit for this facility in
1997. If this Part B permit application is denied, the TSD Facility would be
forced to cease hazardous waste operations and be subject to closure procedures
with respect to such operations. The oil recycling operations that are conducted
at such location would be permitted to continue even if the permit is denied. It
is the opinion of management that the failure to obtain such permit and the
subsequent closure of the facility would not have a material adverse effect on
IASI.
The TSD Facilities have the collective ability to accept virtually all
types of hazardous and non-hazardous wastes, except radioactive materials. Each
TSD Facility is specifically regulated with respect to waste types that are
included in its permits.
The TSD Facilities collectively perform the following treatment and
storage services:
- -- bulking and consolidation for off-site incineration
- -- waste water treatment, including heavy metal precipitation,
carbon absorption, oxidation, reduction,
biological treatment and filtration
- -- low level cyanide destruction
- -- fuels blending
- -- oil recycling
- -- phase separation
- -- PCB storage
- -- solids liquification
- -- stabilization of solid and semi-solid sludges
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IASI currently owns nine TSD Facilities, seven of which are
operational. The following table provides certain information concerning the
operating TSD Facilities owned by IASI. These facilities serve markets in the
northeastern and midwestern United States and southern Ontario regions.
PERMITTED
OPERATING AND STORAGE
TSD FACILITY PERMITTED ACTIVITIES CAPACITIES
------------ -------------------- ----------
Republic Environmental Part B Permit - hazardous waste Operating capacities - approximately 55
Systems (Pennsylvania), treatment and storage facilities million gallons per year bulk liquid,
Inc., Hatfield, PA; for hazardous and non-hazardous 73,000 tons per year bulk solid, 99,000
(formerly known as Waste solid and liquid waste in bulk, drums per year; storage capacity
Conversion, Inc., "RES drum and lab pack; interim status -approximately 568 drums, 335,000 gallons
(Pennsylvania)") PCB storage bulk liquid, 1,500 cubic yards solid
Republic Environmental Part B application filed in 1986; Operating capacities - approximately 18
Recycling (New Jersey), EPA and NJDEP (defined herein) million gallons per year of bulk waste;
Inc.; Clayton, New Jersey interim status-waste oil blending storage capacity - 2 million gallons
and recycling, fuels blending and
transfer facility
Republic Environmental Part B Permit - bulk solid Operating capacities - approximately
Systems (Cleveland), Inc., hazardous waste treatment and 124,800 tons per year bulk solid, 18,250
Bedford, Ohio; (formerly storage, hazardous and drums per year; storage capacity
Evergreen Environmental non-hazardous drum treatment, -approximately 975 drums and 47,500
Group, Inc., "RES bulk liquids and oils treatment gallons bulk liquid, 1,000 cubic yards
(Cleveland)") and fuels blending solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.4
Systems (Fort Erie) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Fort Erie, Ontario transfer and storage 1,170 tons per year bulk solid, 52,000
drums per year; storage capacity -
approximately 1,300 drums and 65,000
gallons bulk liquid, 120 tons solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 12.5
Systems (Brantford) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid;
Brantford, Ontario transfer and storage storage capacity - 175,000 gallons bulk
liquid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 2.9
Systems (Pickering) Ltd.; treatment, processing, recovery, million gallons per year bulk or drum
Pickering, Ontario transfer and storage liquid or solid; storage capacity -
110,000 gallons bulk or drum
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.1
Systems (Brockville) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Brockville, Ontario transfer and storage 24,000 tons per year bulk solid,
approximately 39,000 drums per year;
storage capacity - 3,000 drums and 120,000
gallons bulk liquid
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IASI also owns TSD Facilities in Farmingdale, New York and Dayton,
Ohio, at which operations terminated in June 1993 and October 1995,
respectively. See "Legal Proceedings - Administrative Proceedings - RES
(Cleveland) and Republic Environmental Systems (Ohio), Inc." and "- Republic
Environmental Systems (New York), Inc."). With respect to the closing of both of
these TSD Facilities, IASI believes that it has accrued the appropriate costs.
During June 1996, the Ohio Environmental Protection Agency (the "Ohio
EPA") approved the expansion of the types of waste managed in IASI's TSD
Facility located in Cleveland, Ohio. The remaining permit revisions are
currently still under review. Management expects final approval of the remaining
permit revisions during 1997.
TRANSPORTATION SERVICES. As an integral part of IASI's treatment,
storage and disposal operations, hazardous and non-hazardous wastes are
collected from customers and transported by IASI to and between its TSD
Facilities for treatment or bulking in preparation for shipment to final
disposal locations. In providing this service, IASI utilizes a variety of
specially designed and constructed tank trucks, vacuum trucks and semi-trailers.
Liquid waste is frequently transported in bulk, but may also be transported in
drums. Heavier sludges or bulk solids are transported in sealed roll-off
containers or sealed gate-dump trailers.
IASI's United States hazardous waste transportation services are
performed primarily by two of IASI's waste services subsidiaries, Republic
Environmental Systems (Transportation Group), Inc. ("RES (Transportation
Group)") and Chem-Freight, Inc. ("Chem-Freight"). RES (Transportation Group) is
located in Hatfield, Pennsylvania and has been operating since 1985.
Chem-Freight is located in Walton Hills, Ohio and has been operating since 1971.
These trucking companies provide a majority of their direct services to IASI's
TSD Facilities. IASI believes that this transportation arrangement ensures
quality control and improved efficiency and helps prevent delays at the TSD
Facilities. Trucking revenues for services provided to third parties, such as
other environmental service companies, waste brokers and waste generators, are
recognized as trucking revenue. Third-party customers of RES (Transportation
Group) and Chem-Freight include general industrial businesses and other waste
management companies. RES (Transportation Group) is licensed to haul in 36
states from the eastern to the midwestern regions of the United States and
Chem-Freight is licensed to haul in the 48 contiguous states.
Most of the transportation services provided to IASI's Canadian TSD
Facilities are performed by one of IASI's subsidiaries, Republic Environmental
Systems (Brockville) Ltd. ("RES (Brockville)"). RES (Brockville) is licensed to
haul in the provinces of Ontario and Quebec in Canada and in the states of
Michigan and New York in the United States.
REMEDIATION. IASI's hazardous waste division provides selected
remediation services through its subsidiary, Republic Environmental Systems
(Technical Services Group), Inc. ("RES (Technical Services)"). RES (Technical
Services) is a full-service environmental remediation contractor specializing in
remedial services, tank cleaning, testing and removal, decontamination/lagoon
closure, excavation and removal of contaminated soils, dewatering, emergency
response, "Superfund" clean-up work and waste sampling. These services are
provided to IASI's TSD Facility customers and others on a competitive bid basis.
When IASI is engaged to perform an entire environmental remediation
project, it will first perform a site or situation assessment which involves
gathering samples from the contaminated site and then analyzing them to
establish or verify the nature and extent of the contaminants. Analysis of
samples is conducted by IASI at its TSD Facilities or by independently-operated
laboratory companies. IASI's engineering and consulting group then develops,
evaluates and presents alternative solutions to remedy the particular situation.
TECHNICAL SERVICES. At IASI's analytical facilities, technicians test
samples provided by customers through the use of comprehensive analytical
procedures to identify and quantify toxic pollutants in virtually every
component of the environment, including, without limitation, drinking water,
surface and groundwater, soil, air, food, industrial effluents and biological
tissues. The laboratory staff evaluates the properties of a given material,
selects appropriate analytical methods, and designs, documents and executes a
laboratory work plan that results in a comprehensive technical report.
IASI also provides environmental consulting services, including
regulatory consulting, RCRA consulting, Environmental Clean-up Responsibility
Act site assessment, remedial action plan preparation, treatment process
technology and system design, waste minimization programs planning and alternate
waste disposal evaluations.
SALES AND MARKETING
IASI's sales and marketing strategy is to provide full-service
environmental management to its customers. IASI targets customers of all sizes
from small quantity generators to large "Fortune 100" companies. Marketing
efforts also target environmental engineers, real estate brokers, potentially
responsible party ("PRP") committees, lawyers, hospitals and waste brokers.
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IASI believes in maintaining a strong foundation of repeat business.
IASI derives its business from a broad base of clientele which management
believes enables IASI to experience stable growth. Marketing efforts focus on
continuing and increasing business with existing customers, as well as
attracting new clients.
COMPETITION
The hazardous waste treatment, storage and disposal industry is highly
competitive and requires substantial amounts of capital. The competition in this
industry includes large national companies such as Clean Harbors, Inc., Laidlaw
Environmental Services, Inc. and Rollins Environmental, Inc., as well as local
TSD Facilities and disposal and treatment companies. IASI environmental services
subsidiaries compete for business on the basis of price and geographic location.
CUSTOMERS
IASI's sales efforts with respect to its environmental services
operations, have been directed toward establishing and maintaining business
relationships with businesses in the eastern and midwestern regions of the
United States and Ontario, Canada, which have ongoing requirements for one or
more of IASI's services. No one customer individually comprises more than 5% of
the total consolidated revenue of IASI.
SEASONALITY
IASI's environmental services operations experience seasonal
fluctuations, with higher demand commencing in approximately April of each year
and continuing through October, and lower demand occurring from November through
March. Additionally, IASI's environmental services operations may experience
operational limitations from November through March due to weather conditions in
the northeastern United States and southeastern Ontario. Severe weather
experienced during winter months may adversely affect IASI's results of
operations.
REGULATION
The transportation and disposal of solid and chemical wastes and
rendering of related environmental services are subject to federal, state,
provincial and local requirements which regulate health, safety, the
environment, zoning and land-use. Operating permits are generally required for
TSD Facilities and certain transportation vehicles, and these permits are
subject to revocation, modification and renewal. Federal, state, provincial and
local regulations vary, but generally govern waste management activities
(including final disposal), the location and use of facilities and also impose
restrictions to prohibit or minimize air and water pollution. In addition,
governmental authorities have the power to enforce compliance with these
regulations and to obtain injunctions or impose fines in the case of violations,
including criminal penalties. These regulations are administered by the EPA and
various other federal, state, provincial and local environmental, health and
safety agencies and authorities, including the Occupational Safety and Health
Administration of the United States Department of Labor.
Although IASI strives to conduct its operations in compliance with
applicable laws and regulations, IASI believes that in the existing climate of
heightened legal, political and citizen awareness and concerns, companies in the
hazardous waste and environmental services industry, including IASI, may be
faced with fines and penalties and the need to expend funds for remedial work
and related activities at TSD Facilities. IASI has established a reserve to
cover such fines, penalties and costs which management believes will be
adequate. Further, in connection with the acquisition of certain TSD Facilities,
IASI has been indemnified against certain environmental liabilities. See "Legal
Proceedings." While such amounts expended in the past or anticipated to be
expended in the future have not had and are not expected to have a materially
adverse effect on IASI's financial condition or operations, the possibility
remains that technological, regulatory or enforcement developments, the results
of environmental studies or other factors could materially alter this
expectation and despite such reserves and indemnification obligations, could
adversely affect IASI's operating results.
IASI's operation of TSD Facilities subjects it to certain operating,
monitoring, site maintenance and closure obligations. In order to construct,
expand and operate a TSD Facility, one or more construction or operating
permits, as well as zoning approvals, must be obtained. These operating permits
and zoning approvals are difficult and time-consuming to obtain, and the
issuance of such permits and approvals often is opposed by neighboring
landowners and local and national citizens' groups. Once obtained, the operating
permits may be subject to periodic renewal and are subject to modification and
revocation by the issuing agency. In connection with IASI's acquisition of
existing TSD Facilities, it often may be necessary to expend considerable time,
effort and money to bring the acquired facilities into compliance with
applicable requirements and to obtain the permits and approvals necessary to
increase their capacity. The failure of IASI to renew existing permits or obtain
newly required permits, could adversely affect IASI's operating results. In
addition, IASI's waste transportation operations are subject to evolving and
expanding laws and regulations that may impose additional monitoring, training
and safety requirements.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. Citizens' groups may also bring suit for alleged violations.
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During the ordinary course of its operations, IASI may from time to time receive
citations or notices from such authorities that its operations are not in
compliance with applicable environmental, health or safety regulations. Upon
receipt of such citations or notices, IASI will work with the authorities to
attempt to resolve the issues raised. Failure to correct the problems to the
satisfaction of the authorities could lead to monetary or criminal penalties,
curtailed operations or facility closure any of which could have a material
adverse effect on IASI's operating results.
FEDERAL REGULATION. The following summarizes the primary United States
federal statutes affecting the business of IASI:
(1) THE SOLID WASTE DISPOSAL ACT ("SWDA"), AS AMENDED BY RCRA.
SWDA and its implementing regulations establish a framework for the
regulation of the generation, handling, transportation, treatment,
storage and disposal of hazardous and non-hazardous wastes. They also
require states to develop programs to insure the safe disposal of solid
wastes in sanitary landfills.
Subtitle C of RCRA imposes a variety of regulatory
requirements on a person who is either a "generator" or "transporter"
of hazardous waste, or an "owner" or "operator" of a hazardous waste
treatment, storage or disposal facility. The EPA has issued regulations
under RCRA for hazardous waste generators, transporters, and owners and
operators of TSD Facilities. These regulations impose, among other
requirements, detailed operating, inspection, training and emergency
preparedness and response standards, as well as requirements for
permitting, manifesting, record keeping and reporting, facility
closure, post-closure care and financial assurance. Owners and
operators of TSD Facilities also are subject to stringent corrective
action requirements that can be very expensive. The Hazardous and Solid
Waste Amendment of 1984 mandated that hazardous wastes be treated prior
to land disposal. Owners and operators of TSD Facilities must treat
wastes to meet specified performance-based or technology-based
treatment standards.
(2) THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION,
AND LIABILITY ACT OF 1980, AS AMENDED ("CERCLA"). CERCLA, also known as
"Superfund," among other things, established a regulatory and remedial
program intended to provide for the investigation and the clean-up of
sites from which there is or has been a release or threatened release
of a hazardous substance into the environment. CERCLA's primary
mechanism for remedying such problems is to impose strict liability
(and pursuant to the interpretation of certain courts, joint and
several liability) for clean-up and for damages to natural resources
upon: (a) any person who currently owns or operates the facility or
site; (b) any person who owned or operated the facility or site at the
time of disposal of hazardous substances; (c) any person who by
contract, agreement or otherwise, arranged or accepted for disposal or
treatment (or for transport for disposal or treatment) of the hazardous
substances; and (d) any generator of the hazardous substances. Under
the authority of CERCLA and its implementing regulations, detailed
requirements apply to the manner and degree of remediation of
facilities and sites where hazardous substances have been or are
threatened to be released into the environment. The costs of CERCLA
investigation and clean-up can be substantial.
Among other things, CERCLA authorizes the federal government
either to remediate sites at which hazardous substances were disposed
and have been or are threatened to be released into the environment, or
to order (or offer an opportunity to order) persons potentially liable
for the clean-up of the hazardous substances to do so. Both the
government and the potentially liable party may seek to recover the
cost of clean-up from the responsible class of persons. In addition,
CERCLA requires the EPA to establish a National Priorities List of
sites at which hazardous substances have been or are threatened to be
released and which require investigation or clean-up.
Liability under CERCLA is not dependent upon the intentional
disposal of "hazardous wastes." It can be founded upon the release or
threatened release, even as a result of unintentional and non-negligent
action, of very small amounts of any one of thousands of "hazardous
substances" listed by the EPA, many of which can be found in household
waste. If this is the case, and if there is a release or threatened
release of such substances, IASI could be held liable under CERCLA for
all investigative and remedial costs even if others may also be liable.
CERCLA also authorizes the imposition of a lien in favor of the United
States upon all real property subject to or affected by a remedial
action for all costs for which a party is liable. The ability of IASI
to obtain reimbursement from others for their allocable share of such
costs would be limited by its ability to find other responsible parties
and prove the extent of each of such other parties' responsibility and
by the financial resources of such other parties. The costs of a CERCLA
clean-up can be very expensive. Given the difficulty of obtaining
insurance for environmental impairment liability, such liability could
have a material impact on IASI's business and financial condition. See
"--Liability Insurance and Bonding."
(3) THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS
AMENDED (THE "CLEAN WATER ACT"). The Clean Water Act establishes a
framework for regulating the discharge of pollutants from a variety of
sources, including TSD Facilities, into streams, rivers and other
waters. Whenever point source runoff from IASI's facilities is to be
discharged into surface waters, the Clean Water Act requires IASI to
apply for and obtain discharge permits, conduct sampling and monitoring
and, under certain circumstances, reduce the quantity of pollutants in
those discharges. In 1990, the EPA published new storm water discharge
regulations which
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require a facility to apply for a storm water discharge permit unless
it is covered under a storm water general permit promulgated by the
agency. These storm water discharge regulations also require a permit
for certain construction activities, which may affect IASI's
operations. If a facility discharges wastewater through a sewage system
to a publicly-owned treatment works ("POTW"), the facility must comply
with discharge limits imposed by the POTW. In addition, states may
adopt groundwater protection programs under the Clean Water Act or Safe
Drinking Water Act or independent state authority that could affect TSD
Facilities.
(4) THE CLEAN AIR ACT. The Clean Air Act establishes a
framework for the federal, state and local regulation of the emission
of air pollutants. These regulations may impose emission limitations
and monitoring and reporting requirements on certain of IASI's
operations. The Clean Air Act Amendments, which were enacted into law
at the end of 1990, resulted in the imposition of stringent
requirements on many activities that were previously largely
unregulated, such as emissions of solvents used in small parts
degreasing baths in IASI's vehicle maintenance shops, as well as
imposing more stringent requirements on, among others, motor vehicle
emissions and emissions of hazardous air pollutants.
(5) THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 ("OSHA").
OSHA authorizes the Occupational Safety and Health Administration to
promulgate occupational safety and health standards. Various of these
standards, including standards for notices of hazardous chemicals and
the handling of asbestos, may apply to IASI's operations.
STATE REGULATION. Each state in which IASI operates has its own laws
and regulations governing hazardous and solid waste disposal, water and air
pollution and in most cases, release and clean-up of hazardous substances and
liability for such matters. The states also have adopted regulations governing
the design, operation, maintenance and closure of TSD Facilities. IASI's
facilities and operations are likely to be subject to many, if not all, of these
types of requirements.
Finally, various states have enacted, are considering enacting or are
considering repealing, laws that restrict the disposal within the state of solid
or hazardous wastes generated outside the state. While laws that overtly
discriminate against out-of-state waste have been found to be unconstitutional,
some laws that are less overtly discriminatory have been upheld in court.
Challenges to other such laws are pending. The outcome of pending litigation and
the likelihood that other such laws will be passed and will survive
constitutional challenge are uncertain. In addition, Congress is currently
considering legislation authorizing states to adopt such restrictions.
CANADIAN REGULATION. IASI's operations in Canada relating to hazardous
waste treatment, recycling and recovery of chemical waste and waste water are
subject to the general business andSeptember 1997 sold its remaining environmental laws and regulations of
Canada, which are similar in nature to United States laws and regulations. While
IASI believes that its Canadian operations are in substantial compliance with
applicable laws and regulations, IASI is unable to predict the course of
development of such laws and regulations.operations.
LIABILITY INSURANCE AND BONDING
IASICentury carries commercial general liability insurance, automobile
liability insurance, workers' compensation, pollution legal liability and employer's liability insurance
as required by law in the various states and
provinces in which operations are conducted and
umbrella policies to provide excess limits of liability over the underlying
limits contained in the commercial general liability, automobile liability and
employer's liability policies. The nature of IASI's environmental services operations exposes it to a
significant risk of liability for legal damages arising out of such operations.
See "Legal Proceedings." The majority of IASI's environmental services
operations have environmental liability insurance subject to certain limitations
and exclusions in excess of the limits required by permit regulations; however,
there is no assurance that such limits would be adequate in the event of a major
loss.
From time to time, IASI may be required to post a performance bond or a
bank letter of credit in connection with the operation of TSD Facilities,
certain remediation contracts or certain environmental permits. Bonds issued by
surety companies operate as a financial guarantee of IASI's performance. To
date, IASI has satisfied financial responsibility requirements by making cash
deposits, obtaining bank letters of credit or by obtaining surety bonds.
EMPLOYEES
At December 31, 1996, IASI1997, Century employed approximately 451 employees, 6 of
whom are party to collective bargaining agreements. IASI1,200 employees. The
Company considers its relationships with its employees to be satisfactory.good.
PROPERTIES
IASI'sCentury's corporate headquarters areis located in Valley View, Ohio in leased
premises. The Company has completed negotiations to lease a 14,000 square foot
portion of an office building in Independence, Ohio and will relocate its
headquarters to 6480 Rockside Woods Blvd., South, Suite 330, Cleveland, Ohio
44131 during the first quarter of 1998. Certain of the property and equipment of
IASIthe Company are subject to liens securing payment of portions of the
indebtedness of IASIthe Company and its subsidiaries. IASI and itsThe Company's subsidiaries
also lease six74 offices in five26 states
as well as one office in Canada, and certain of their equipment. IASIThe Company
believes that all of its facilities are sufficient for its needs.
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In addition, IASI operates seven TSD Facilities in the United States
and Canada. For more information regarding these properties, see
"- Environmental Services - Operations."
ITEM 3. LEGAL PROCEEDINGS
ADMINISTRATIVE PROCEEDINGS
RES (CLEVELAND) AND REPUBLIC ENVIRONMENTAL SYSTEMS (OHIO), INC.
In June 1993, RES (Cleveland) received a Complaint and Compliance Order
from the Enforcement Division of EPA Region 5 alleging that the former owners of
RES (Cleveland)'s TSD Facility failed to submit a proper RCRA Facility
Investigation ("RFI") workplan to the EPA on a timely basis and fined RES
(Cleveland). In September 1993, EPA Region 5 granted approval for implementation
of the RFI workplan submitted by RES (Cleveland). In June 1995, RES (Cleveland)
reached an agreement with EPA Region 5 by consent agreement and final order (the
"CAFO") to settle the issues related to the former owners' failure to achieve an
approvable RFI workplan.GENERAL
The CAFO included a fine of $60,000 and required the
meeting of certain stipulations. IASI paid the fine in June 1995 and completed
all required activities stipulated under the CAFO in December 1996, and
submitted a final report to the EPA detailing the results. In 1996, the EPA
accepted and approved the final RFI report. The EPA has requested and approved a
second phase of the RFI workplan which requires additional sample collections.
In addition, RES (Cleveland) was involved in negotiations with the Ohio
EPA to bring RES (Cleveland)'s facility located in Bedford, Ohio into full
compliance with the Ohio EPA regulations and settle a proposed penalty. In
August 1994, RES (Cleveland) reached an agreement by consent order with the Ohio
EPA which included a penalty for $250,000, payable over a three-year period, as
well as meeting certain stipulations. Final payment on the penalty was made in
1996. RES (Cleveland) has provided all of the required deliverables specified in
the consent order to Ohio EPA and is presently awaiting their final approval.
In June 1996, the Ohio Attorney General's Office began enforcement
proceedings against Republic Environmental Systems (Ohio), Inc. (formerly known
as Ecolotec, Inc., "RES (Ohio)") related to several past alleged violations at
the Dayton, Ohio facility, at which IASI ceased operations in September 1995.
Such violations included the failure to construct certain tertiary containment
features at the facility and issues related to the submission of permit
revisions in connection with the facility's groundwater monitoring program. At
this time, both parties have agreed to enter into a mediation agreement to
attempt to settle these matters with a third party mediator.
In addition, RES (Ohio)'s recent groundwater monitoring program results
indicate that past operations at the facility may have potentially affected
groundwater quality. RES (Ohio) is currently investigating the groundwater
further to determine what, if any, corrective measures should be taken.
In October 1996, the Ohio attorney general's office determined that the
Merger Transactions constituted a change of ownership of Ohio EPA permitted
facilities owned by RES (Cleveland) and RES (Ohio). In addition, the Ohio EPA
may determine that the Merger Transactions constitute a modification of such
permits. As a result, Ohio law requires that the change of ownership of the
permitted facilities, as well as the permit modifications, if any, be approved
by the director of the Ohio EPA, based upon the disclosure statements and an
investigative report prepared by the Ohio attorney general's office. IASI
consummated the Merger Transactions prior to receipt of the requisite approval
of the director of the Ohio EPA as permitted by applicable law. During the
approval process, IASI does not anticipate that the operations at such
facilities will be affected. In the event that the director of the Ohio EPA
ultimately disapproves such change of ownership or, if required, such permit
modifications, IASI would be required to effect the negation of the change of
ownership of such facilities. The negation could be accomplished through the
restoration of the original ownership structure of such facilities, the
disposition of the facilities or another means that complies with the
requirements of applicable law.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
In late June 1993, Republic Environmental Systems (New York), Inc.
("RES (New York")) ceased operations at its TSD Facility in Farmingdale, New
York, due to ongoing disputes and negotiations with various regulatory agencies
including the New York Department of Environmental Conservation (the "New York
DEC"), the town of Oyster Bay and Nassau County. In addition, RES (New York)
received from the New York DEC a proposed Summary Order in an Administrative
Action commenced by the New York DEC against the RES (New York) facility,
whereby the New York DEC sought revocation of RES (New York)'s permit to operate
as a TSD Facility. The New York DEC withdrew a previous consent order against
RES (New York), under which RES (New York) had agreed to pay $100,000 for past
alleged violations at the facility and to resolve several administrative permit
issues.
In early 1994, RES (New York) voluntarily ceased operations at its
hazardous waste TSD Facility and discontinued any efforts to pursue its permit
for this facility as a result of the ongoing disputes described above. In
addition, RES (New York) entered into negotiations for a consent order with the
New York DEC which provided for (i)
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payment of a fine by RES (New York) of $270,000, $170,000 of which will be
suspended upon successful completion of the terms of the consent order, and (ii)
the closure of the facility in accordance with the requirements specified by the
order. RES (New York) has begun closure activities at the facility which it
expects to complete by the end of 1997.
PROCEEDINGS COVERED BY THIRD PARTY INDEMNITY
In connection with the acquisition of Stout, the former stockholders of
Stout (the "Party Stockholders") agreed to indemnify RII, IASI,Company's subsidiaries of
IASI and their respective officers, directors, agents and representatives from
losses associated with, among other things, soil, water and groundwater
contamination occurring prior to RII's acquisition of Stout.
IASI has been identified as a PRP in a number of governmental
investigations and actions relating to waste disposal facilities which may be
subject to remedial action under CERCLA. Proceedings arising under CERCLA
typically involve numerous waste generators and other waste transportation and
disposal companies. Generally, these proceedings are based on allegations that
these entities (or their predecessors) transported hazardous substances to the
facilities in question, in all cases prior to acquisition of Stout by RII. As a
successor to Stout, IASI and RII have become a party to and become potentially
liable in these proceedings to the same extent as Stout. IASI and RII have been
indemnified for all costs and expenses incurred with regard to these proceedings
by Party Stockholders. The Party Stockholders' obligation under the indemnity
was secured by a first lien and perfected security interest covering two million
shares of RII's common stock. During June 1995, Party Stockholders had placed
$7.0 million in an escrow account (the "Party Collateral") in lieu of the two
million shares of RII's stock as security for the remaining indemnification
obligations. IASI is currently paying costs and legal expenses with regard to
these proceedings which are then reimbursed by the Party Stockholders. Pursuant
to agreements with RII, IASI has agreed to assume any and all liabilities of RII
in these proceedings and has accepted assignment from RII of all of its rights
in connection therewith, including, without limitation, RII's rights as
indemnitee and pledgee pursuant to the Party Stockholders indemnification
obligations.
Management believes that the legal and environmental proceedings
covered by the indemnity will be resolved in a manner that will not have a
materially adverse effect on IASI's results of operations or combined financial
position.
The following is a description of proceedings whose claims are covered
by the indemnity obligations of the Party Stockholders.
ADAMS OIL, INC.
In March 1996, IASI and the Party Stockholders entered into an
agreement amending the Merger Agreement and the Settlement Agreement to which
they are parties and voiding the transfer of Adams Oil, Inc. ("Adams Oil") to IASI. Adams Oil is the owner of a former oil terminal located in Camden, New
Jersey at which there is evidence of contamination. Pursuant to such agreement,
on March 3, 1997, IASI transferred ownership of all of the capital stock of
Adams Oil to the Party Stockholders and released to the Party Stockholders $1.5
million of the Party Collateral. The Party Stockholders have agreed to use the
released Party Collateral to comply with New Jersey Department of Environmental
Protection ("NJDEP") requirements regarding the clean-up of the Camden facility,
including the requirement that the Party Stockholders post $500,000 with the
NJDEP within 30 days after the transfer to secure such clean-up. At such time
that the Party Stockholders post the required $500,000 with the NJDEP, IASI has
agreed to release an additional $500,000 of the Party Collateral to the Party
Stockholders. The Party Stockholders also have agreed to indemnify, defend and
hold harmless IASI, its environmental services subsidiary, Republic
Environmental Systems, Inc., and RII from losses incurred in connection with the
environmental condition of the Camden, New Jersey facility.
REPUBLIC ENVIRONMENTAL SYSTEMS (PENNSYLVANIA), INC.
RES (Pennsylvania) has been named as a PRP in the North Penn Area No. 2
regional groundwater problem involving 56 square miles occupied by hundreds of
industrial companies. The EPA is currently investigating the septic system and
the contamination of groundwater and is considering adding other PRP companies.
The EPA and RES (Pennsylvania) have entered into an administrative order on
consent to investigate and determine: (i) whether or not there is sufficient
evidence to indicate that RES (Pennsylvania) has contributed to the groundwater
problem, and (ii) if RES (Pennsylvania) should participate in a regional
investigation. RES (Pennsylvania) has recently completed the required soil and
groundwater testing, as required under the administrative order, and has
submitted a final report to the EPA. Based on the results of this testing, RES
(Pennsylvania) has requested the EPA to release it from further investigation.
In addition, RES (Pennsylvania) also has been named as a PRP along with
13 other primary defendants for the recovery costs to remediate the Moyers
Landfill Site in eastern Pennsylvania. A company previously known as Waste
Conversion of Delaware, Inc. disposed of materials at Moyers Landfill from 1979
to 1981. This company then sold its assets to RES (Pennsylvania), which was then
owned by Stout. RES (Pennsylvania) is currently in settlement negotiations with
the EPA to limit its exposure in this matter.
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RES (New York) and RES (Pennsylvania) are parties in a PRP action with
respect to a former IASI Aqua-Tech TSD Facility in South Carolina. There are 180
parties to date. In April 1993, an agreement was reached whereby IASI paid
approximately $360,000 for proposed settlement of certain issues at the
facility, pending the PRP committee's final allocation to the PRPs.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
The New York DEC has alleged that RES (New York) is liable for unpaid
generator fees in the amount of $240,000 plus interest. RES (New York) and other
owners of New York TSD Facilities argue that the state is subjecting them to
excess fees by categorizing them both as a TSD Facility and as an original waste
generator. The central issue of the amount of generator fees owed by RES (New
York) has been stayed pending New York DEC determination of the appropriate
category for RES (New York) and what generator fee it should pay as a result
thereof. This matter will be settled under the consent order being negotiated
for the facility's closure. Payments scheduled under this order will be credited
to settle this matter.
In addition, on March 19, 1992, the New York DEC informed RES (New
York) that it may be a PRP with respect to the Quanta Resources site in Queens,
New York. At present, RES (New York) is awaiting additional information from the
New York DEC in order to assess the extent of its exposure, but believes it is
not material.
GENERAL
IASI is also a party to other administrativelegal proceedings, related to its
environmental services operations which have
arisen, in the ordinary course of itstheir business. Although it is possible that
losses exceeding amounts already recordedreserved may be incurred upon ultimate
resolution of these matters, as well as
the matters described above, management believes that such losses, if any, will
not have a material adverse effect on IASI'sthe Company's business or financial
position; however, unfavorable resolution of each matter individually or in the
aggregate could affect the consolidated results of operations for the quarterly
periods in which they are resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submittedOn October 28, 1997, a majority of the Company's Board of Directors
approved the adoption of a proposed amendment to the Company's Certificate of
Incorporation to change its name from International Alliance Services, Inc. to
Century Business Services, Inc. On December 22, 1997, in accordance with
Delaware Law, the holders of a votemajority of stockholders during the fourth
quarteroutstanding shares of 1996.
17the
Company's Common Stock executed a written consent approving the amendment.
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DIRECTORS AND EXECUTIVE OFFICERS OF
IASICENTURY BUSINESS SERVICES, INC.
The following table sets forth certain information as of March 28,December 31, 1997
regarding the directors, executive officers and certain key employees of IASI.the
Company. Each executive officer of IASIthe Company named in the following table has
been elected to serve until his successor is duly appointed or elected or until
his or her earlier removal or resignation from office. No arrangement or understanding
exists between any executive officer of IASIthe Company 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 63 Chairman of the Board
Edward F. Feighan 49DeGroote(3) 64 Chief Executive Officer, President and Chairman of
the Board
Gregory J. Skoda(3) 41 Executive Vice President and Director
Roswell P. Ellis 62Charles D. Hamm, Jr.(3) 43 Chief Financial Officer and Treasurer
Edward F. Feighan 50 Senior Vice President, - Insurance GroupPublic Affairs
Douglas R. Gowland 5556 Senior Vice President, - Environmental Operations
and DirectorBusiness Integration
Keith W. Reeves 40 Senior Vice President, - Business Services
Gregory J. Skoda 40 Executive Vice President and
Chief Financial Officer
Craig L. Stout 48 Chief Operating Officer49 Senior Vice President, Insurance Services
Rick L. Burdick(1) 46 Director
Joseph S. DiMartino 54 Director
Harve A. Ferrill(1)(2) 65 Director
Hugh P. Lowenstein(2) 67 Director
Richard C. Rochon(1)(2) 40 Director
OTHER KEY EMPLOYEES:
Thomas J. Bregar 41 Vice President, Information Technology Systems
Daniel J. Clark 43 Vice President, Corporate Relations
Ralph M. Daniel, Jr 41 Vice President, Payroll Administration Services
Roswell P. Ellis 63 Vice President, Specialty Insurance Services
Charles J. Farro 47 Vice President, Employee Benefits Design and
DirectorAdministration Services
Kenneth M. Millisor 60 Vice President, Workers' Compensation Services
Steven M. Nobil 50 Vice President, Human Resources Services
Patrick J. Simers 37 Vice President, Valuation Services
C. Robert Wissler 51 Vice President, Comprehensive Business Services
Andrew B. Zelenkofske 37 Vice President, Accounting Systems, Advisory and
Tax Services
Barbara A. Rutigliano 46 Corporate Secretary
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Management Executive Committee
EXECUTIVE OFFICERS AND DIRECTORS:
MICHAEL G. DEGROOTE has served as the Chairman of the Board of IASIthe Company
since the Spin-off.April 1995 and as Chief Executive Officer and President since November
1997. Mr. DeGroote also served as President and Chief Executive Officer of IASIthe
Company from the Spin-offApril 1995 until the Merger Transactions in October 1996. Mr. DeGroote has served as Vice Chairman and a director of Republic Industries,
Inc. ("RII") since August 1995. Mr. DeGroote also served as Chairman of
the Board, President and Chief Executive Officer of RIIRepublic Industries, Inc.
("RII") from May 1991 to August 1995
and Senior Chairman of the Board of RII from May 1991 to August 1991.1995. Mr. DeGroote is a private investor who owned a controlling interest infounded 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 he sold his interest to
Canadian Pacific Limited in 1988.1990. Mr. DeGroote also serves as a director of Gulf
Canada Resources, Inc.RII.
13
14
GREGORY J. SKODA has served as the Executive Vice President and a Director
of the Company since November 1997, the Chief Financial Officer and Treasurer of
the Company from November 1996 until November 1997, and as a director and an
officer of a number of the Company's subsidiaries. Prior to the Company's
acquisition of SMR & Co. Business Services ("SMR") in December 1996, Mr. Skoda
served as President and Chairman of SMR, which he founded in 1980. Mr. Skoda is
a CPA and an active member of the American Institute of Certified Public
Accountants in the Tax, Employee Benefits, and Management Advisory Services
divisions.
CHARLES D. HAMM, JR. has served as Chief Financial Officer and Treasurer
since November 1997. Mr. Hamm was associated with KPMG Peat Marwick LLP from
June 1984 until November 1997, serving as a partner of such firm from July 1996
until November 1997. Mr. Hamm is a CPA and a member of the American Institute of
Certified Public Accountants and the Ohio Society of Certified Public
Accountants.
EDWARD F. FEIGHAN has served as Senior Vice President, Public Affairs of
the Company since November 1997. Mr. Feighan served as Chief Executive Officer,
President and a Director of IASI sincethe Company from October 1996.1996 through November 1997.
Mr. Feighan is also Vice Presidentserves as a director and an officer of Alliance Holding Corporation ("Alliance Holding"), a position he has held since
joining Alliance Holding in 1993.number of the
Company's subsidiaries. From 1983 until 1993, Mr. Feighan served as the
representative from the Ohio 19th Congressional District of the United States
House of Representatives. During his tenure in Congress, Congressman Feighan
served on the Judiciary and the House Foreign Affairs Committee; Chairman,
International Narcotics Control Committee; President, The Interparliamentary
Union; and permanent Representative to the Helsinki Commission. He currently
serves on the board of trustees of the National Democratic Institute for
International Affairs, the Handgun Control Federation
of Ohio, and the Rock and Roll Hall of Fame and Museum.
ROSWELL P. ELLIS has served as the Senior Vice President - Insurance
Group since March 1997. Mr. Ellis serves as Chairman and President of CSC, a
position he has held since 1987, and Chairman of Continental Heritage and
Evergreen, all subsidiaries of IASI.
DOUGLAS R. GOWLAND has served as the Senior Vice President, -
Environmental OperationsBusiness
Integration since October 1996 and a Director of IASI. In addition,
Mr. Gowland has served as President of IASI's hazardous waste subsidiaries since
March 1992. From the date of the Spin-off until the Merger Transactions,November 1997. Mr. Gowland served as IASI'sa Director of the Company
from April 1995 through November 1997. From April 1995 until October 1996, Mr.
Gowland served as the Company's Executive Vice President and Chief Operating
Officer.
From March 1992 until the Spin-off, Mr. Gowland served as President of IASI. From January 1992 to April 1995, Mr. Gowland served as Vice
President --- Hazardous Waste Operations of RII. From March 1991 to January 1992,
Mr. Gowland served as Vice President of DRG Environmental Management, Inc. Prior
thereto, he served as President of Great Lakes Environmental Systems, Ltd.
KEITH W. REEVES has served as the Senior Vice President, - Business Services
since March 1997.1997 and as a director and an officer of a number of the Company's
subsidiaries. Mr. Reeves has also servesserved as the President of SMR a
position of which he has held since December
1996. Mr. Reeves served as Vice President of SMR from August 1984 until its
acquisition by IASIthe Company in December 1996. Mr. Reeves is a CPA and a member of
the American Institute of Certified Public Accountants and the Ohio Society of
Certified Public Accountants.
GREGORY J. SKODACRAIG L. STOUT has served as the ExecutiveSenior Vice President, and Chief
Financial Officer of IASIInsurance Services
since December 1996.November 1997. Mr. Skoda also serves as the Vice
President and Chief Financial Officer of Alliance Holding, a position he has
held since June 1, 1994. Prior to IASI's acquisition of SMR in December 1996,
Mr. Skoda served as President and Chairman of SMR, which Mr. Skoda founded in
1980. Mr. Skoda is an active member of the American Institute of Certified
Public Accountants in the Tax, Employee Benefits, and Management Advisory
Services divisions.
CRAIG L. STOUT hasStout served as Chief Operating Officer and a Director
of IASI sincethe Company from October 1996.1996 through November 1997. Mr. Stout also serves as
Chief Operating Officera director and an officer of Alliance Holding, a position he has held sincenumber of the formation of Alliance Holding
in 1987.Company's subsidiaries. Prior to
joining the Mergers,Company, Mr. Stout served as Executive Vice President of Alliance
Holding Corporation which was the holding corporation of the CSC Group and Chairman ofCSA
and two other companies which
18
20 he founded, Contract Operations Planning, Inc., a
surety claims management firm, and Contract Surety Reinsurance Corporation, a
reinsurance intermediary for facultative surety reinsurance.
TheseRICK L. BURDICK has served as a Director of the Company since November
1997. Mr. Burdick has been a partner at the law firm of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. since April 1988. Mr. Burdick serves on the Boards of
Directors of RII and J. Ray McDermott, S.A.
JOSEPH S. DIMARTINO has served as a Director of the Company since November
1997. Mr. DiMartino has been Chairman of the Board of Dreyfus Group of Mutual
Funds since January 1995. Mr. DiMartino served as President, Chief Operating
Officer and Director of The Dreyfus Corporation from October 1982 until December
1994. Mr. DiMartino also serves on the Board of Directors of Noel Group, Inc.,
Staffing Resources, Inc., Health Plan Services Corporation, Carlyle Industries,
Inc., and the Muscular Dystrophy Association.
HARVE A. FERRILL has served as a Director of the Company since October
1996. Mr. Ferrill has served as Chief Executive Officer of Advance Ross
Corporation, a company that provides tax refunding services ("ARC"), since 1991
and as President of Ferrill-Plauche Co., Inc., a private investment company,
since 1982. Mr. Ferrill
14
15
served as President of ARC from 1990 to 1993 and as Chairman of the Board from
1992 to 1996. Mr. Ferrill has served as Chairman of the Board of GeoWaste
Incorporated since 1991 and also serves on the Boards of Directors of Gaylord
Container Corporation and Quill Corporation.
HUGH P. LOWENSTEIN has served as a Director of the Company since March
1997. Mr. Lowenstein has served as the Founder and Chief Executive Officer of
Shore Capital Ltd. (Bermuda), a consulting and investment advisory firm, since
1994. Mr. Lowenstein served as a Managing Director of Donaldson, Lufkin and
Jenrette Securities Corporation from 1987 to 1994. Mr. Lowenstein also serves on
the Board of Directors of Terra Nova (Bermuda) Holdings Ltd.
RICHARD C. ROCHON has served as a Director of the Company since October
1996. Mr. Rochon has served since 1988 as President of Huizenga Holdings, Inc.,
a management and holding company for diversified investments in operating
companies, were merged into Alliance
Holding priorjoint ventures, and real estate, on behalf of its owner, Mr. H. Wayne
Huizenga. Mr. Rochon also has served as a director since September 1996 and as
Vice Chairman of Florida Panthers Holdings, Inc., a leisure and recreation and
sports and entertainment company, since April 1997. From 1985 until 1988, Mr.
Rochon served as Treasurer of Huizenga Holdings, Inc. and from 1979 until 1985,
he was employed as a certified public accountant by the international public
accounting firm of Coopers & Lybrand, L.L.P.
OTHER KEY EMPLOYEES:
THOMAS J. BREGAR was named Vice President, Information Technology Systems
in November 1997. Mr. Bregar joined SMR in December 1996 to develop its
Information Technology Consulting Practice. Prior to joining SMR, Mr. Bregar was
with Price Waterhouse's Management Consulting Services Practice from 1986
through 1992, and again as Director from 1994 to 1996. In 1993, he served as
Vice President in the Information Management Services Division at Society
National Bank (now Keycorp Services).
DANIEL J. CLARK was named Vice President, Corporate Relations in November
1997 and is the Senior Vice President of Evergreen National Indemnity Company
("Evergreen") and a director of Century Surety Company, both subsidiaries of the
Company. Prior to joining Evergreen, Mr. Clark served as Chief of Staff for then
Congressman Edward F. Feighan from 1983 through 1993. Mr. Clark is a member of
the Ohio Bar Association and serves as a Board Member for the Port of Cleveland.
RALPH M. DANIEL, JR. was named as Vice President, Payroll Administration
Services in November 1997. Prior to joining Century, Mr. Daniel served as
Chairman and Chief Executive Officer of BMS, Inc. (Business Management
Services), which he co-founded, from 1988 through its acquisition by the Company
in August 1997. Mr. Daniel is a CPA and serves on the Board of the Independent
Payroll and Employer Services Association.
ROSWELL P. ELLIS was named Vice President, Specialty Insurance Services in
November 1997. Mr. Ellis served as the Company's Senior Vice
President -- Insurance Group from March 1997 to November 1997. He continues to
serve as Chairman and Chief Executive Officer of Century Surety Company, a
position he has held since 1987, and he is also Chairman of Continental Heritage
Insurance Company and Vice Chairman and CEO of Evergreen, all subsidiaries of
the Company. Mr. Ellis has been in the insurance business for over 35 years and
holds four professional designations: Chartered Property and Casualty
Underwriter, Chartered Life Underwriter, Associate in Claims and Associate in
Surplus Lines.
CHARLES J. FARRO was named Vice President, Employee Benefits Design and
Administration Services in November 1997. Mr. Farro also serves as Chairman and
Chief Executive Officer of The Benefits Group, a subsidiary of the Company. Mr.
Farro serves on the Boards of Directors of the March of Dimes and the Akron Art
Museum.
KENNETH R. MILLISOR was named Vice President, Workers' Compensation
Services in November 1997. He is the Chairman and Chief Executive Officer of M&N
Risk Management, Inc. and the President and Chief Executive Officer of Millisor
& Nobil Co., L.P.A., subsidiaries of the Company. Mr. Millisor was admitted to
the effective dateBar in 1961 and is an active member of the Merger TransactionsAkron, Ohio State and their
operations are now conducted by IASI.American
Bar Associations.
15
16
STEVEN M. NOBIL was named Vice President, Human Resources Services in
November 1997. Mr. Nobil serves as President of M&N Risk Management, Inc., a
subsidiary of the Company. Mr. Nobil serves on several Boards including the
Diabetes Association of Greater Cleveland, Baldwin Wallace College, Cuyahoga
Community College, Big Brothers and Big Sisters, American Red Cross and Grand
Prix Charities.
PATRICK J. SIMERS was named Vice President, Valuation Services in November
1997. Mr. Simers serves as President of Valuation Counselors Group, Inc., a
subsidiary of the Company. Mr. Simers is a Certified Real Estate Appraiser in 12
states and maintains memberships in the American Society of Appraisers and the
Appraisal Institute.
C. ROBERT WISSLER was named Vice President, Comprehensive Business Services
in November 1997. Mr. Wissler serves as President and Chief Executive Officer of
Comprehensive Business Services, Inc., a subsidiary of the Company. He was
Senior Vice President and Chief Financial Officer of Sir Speedy, Inc. from 1978
through 1990. Prior to that time, Mr. Wissler was an auditor with Arthur Young &
Co. from 1972 to 1974, and he was a baseball player with the St. Louis Cardinals
from 1969 through 1972. Mr. Wissler is a Director of International Franchise
Association.
ANDREW B. ZELENKOFSKE was named Vice President, Accounting Systems,
Advisory and Tax Services in November 1997. Mr. Zelenkofske serves as President
of ZA Business Services, Inc., a subsidiary of the Company. Prior to joining
Century, Mr. Zelenkofske served for several years as President and Managing
Director of Zelenkofske Axelrod and Co., Ltd. Mr. Zelenkofske is a CPA and has
been appointed to the Pennsylvania State Board of Accountancy.
BARBARA A. RUTIGLIANO was named Corporate Secretary in December 1997. Ms.
Rutigliano was Senior Counsel and Corporate Secretary of BP America Inc. from
1989 until 1997 and was associated with the law firm of Squire, Sanders &
Dempsey from 1983 to 1989. Ms. Rutigliano is a member of the Ohio Bar, the
American Bar Association and the American Society of Corporate Secretaries.
16
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
IASI'sPRICE RANGE OF COMMON STOCK
The Common Stock of the Company is listedquoted on The Nasdaq which is the principal trading
market for these securities,National Market
under the trading symbol "IASI.""CBIZ". Prior to December 23, 1997, the Common Stock
was quoted under the trading symbol "IASI". The following table below sets forth for the periods indicated, therange
of high and low sales prices for the Common Stock as listedreported on Nasdaq.The Nasdaq
National Market for the periods indicated. Prior to April 27, 1995, the day on
which the Common Stock of the Company was first publicly traded, there was no
public market for the Common Stock of the Company. The following prices are
adjusted for the Company's July 1996 two for one stock split.
PRICE RANGE
OF COMMON STOCK
PRICE
RANGE
--------------------------------------
HIGH LOW
---- --------- -----
1995
Second Quarter(1)....................... $2 1/4 $1 1/4Quarter (beginning April 27, 1995)................ $ 2.25 $1.25
Third Quarter........................... $4 $1 13/16Quarter............................................ 4.00 1.81
Fourth Quarter.......................... $2 5/16 $1 9/16Quarter........................................... 2.31 1.56
1996
First Quarter........................... $1 19/32 $1 1/4Quarter............................................ $ 1.59 $1.25
Second Quarter.......................... $20 7/8 $1 7/16Quarter........................................... 20.88 1.44
Third Quarter........................... $18 3/4 $4 3/4Quarter............................................ 18.75 4.75
Fourth Quarter.......................... $12 3/4 $7 1/2Quarter........................................... 12.75 7.50
1997
First Quarter............................................ $15.13 $9.88
Second Quarter........................................... 11.50 7.88
Third Quarter............................................ 11.75 7.88
Fourth Quarter........................................... 17.25 8.75
(1) ConsistedOn December 31, 1997, the last reported sale price of the period from the date on which the Common Stock was
first listed on Nasdaq, April 27, 1995, through June 30, 1995.
On March 27, 1997, the closing sales price ofCompany's Common
Stock as reported byon The Nasdaq National Market was $11.125$17.25 per share. The numberAs of
February 13, 1998, the Company had 6,385 holders of record holders of its Common Stock as
of March 7, 1997, was 953.Stock.
DIVIDEND POLICY
The Company's credit facility contains restrictions on the Company's
ability to pay dividends. Since April 27, 1995, the Spin-off, IASICompany has not declared or
paid any cash dividends on its Common Stockcapital stock. The Company intends to retain its
earnings, if any, for use in its business and the Board of Directors does not currently anticipate paying dividends on the Common Stock at any
timecash dividends in the foreseeable future. The payment
of future dividends will be determined by IASI's Board of Directors in light of
conditions then existing, including IASI's earnings, financial condition,
capital requirements, restrictions in financing agreements, business conditions
and other factors. The payment of dividends on the Common Stock is presently
prohibited under the terms of IASI's credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
19
21
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for IASICentury
and are derived from the historical consolidated and combined financial
statements and notes thereto, which are included elsewhere in this Annual Report
of IASI.Century. The information set forth below should be read in conjunction with
"Management's
17
18
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated and combined financial statements of IASICentury and the notes
thereto, which are included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
1992
---- ---- ---- ---- ------------ -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues:
Business services fees and commissions:............ $ 63,411 $ 1,606 $ -- $ -- $ --
Specialty insurance services (regulated):
Premiums earned .......................... $ 27,743 $earned.................................. 37,238 27,651 26,962 $ 23,368 $ 17,373 $ 11,534
Net investment income ....................income............................ 4,524 3,564 3,341 2,477 1,377 1,272
Net realized gains (losses) on investmentsinvestments....... 3,044 1,529 166 80 (91)
210
Other income ............................. 2,933income..................................... 13 1,419 470 1,385 1,737
269
--------- --------- -------- -------- --------
Total revenues................................... $108,230 $ 35,769 $30,939 $27,310 $20,396
Expenses:
Operating expenses -- business services............ 50,277 1,107 -- -- --
Loss and loss adjustment expenses.................. 20,682 17,624 15,117 12,494 8,613
Policy acquisition expenses........................ 9,670 7,699 7,774 5,428 4,996
Corporate general and administrative expenses...... 4,578 302 -- -- --
Depreciation and amortization expenses............. 2,612 320 -- -- --
Other expenses..................................... 2,331 2,655 3,157 4,544 3,302
--------- --------- ----------------- -------- --------
Total expenses................................... 90,150 29,707 26,048 22,466 16,911
Income from continuing operations before net
corporate interest income and income tax expense... 18,080 6,062 4,891 4,844 3,485
Net revenues ............................. $ 35,769 $ 30,939 $ 27,310 $ 20,396 $ 13,285
========= ========= ========= ========= =========
Interest expense ......................... $ 46corporate interest income........................ 965 -- -- -- --
Other expenses ........................... 4,384 $ 3,157 $ 4,544 $ 3,287 $ 2,039--------- --------- -------- -------- --------
Income from continuing operations before income tax
expense .....................expense............................................ 19,045 6,062 4,891 4,844 3,485
2,123
Income tax expense .......................expense................................... 6,280 1,640 1,422 1,344 1,189
751
--------- --------- --------- --------- ----------------- -------- --------
Income from continuing operations ........operations.................... 12,765 4,422 3,469 3,500 2,296
1,372
Loss from operations of discontinued operations ........ (38)business........ 663 38 -- -- --
Loss on disposal of discontinued business............ 572 -- -- -- --
--------- --------- --------- --------- ----------------- -------- --------
Net income ...............................income........................................... $ 11,530 $ 4,384 $ 3,469 $ 3,500 $ 2,296 $ 1,372
========= ========= ========= ========= =========
Gross written premiums ................... $ 42,888 $ 37,695 $ 37,869 $ 29,992 $ 17,786
Net written premium ...................... 31,149 26,677 27,219 21,173 12,089======== ======== ========
Weighted average common shares....................... 36,940 17,863 14,760 14,760 14,760
Weighted average common shares and dilutive potential
common share equivalents ............... 32,213shares...................................... 48,904 24,032 16,956 16,956 16,956
16,956
EarningsBasic earnings per share:
Primary ................................From continuing operations......................... $ 0.35 $ 0.25 $ 0.24 $ 0.24 $ 0.16
From discontinued operations....................... $ (0.04) $ -- $ -- $ -- $ --
Diluted earnings per share:
From continuing operations......................... $ 0.26 $ 0.18 $ 0.20 $ 0.21 $ 0.200.14
From discontinued operations....................... $ 0.20(0.02) $ 0.14-- $ 0.08
========= ========= ========= ========= =========
Fully diluted ..........................-- $ 0.16-- $ 0.20--
Gross written premiums............................... $ 0.2059,751 $ 0.1442,888 $37,695 $37,869 $29,992
Net written premiums................................. $ 0.08
========= ========= ========= ========= =========37,488 $ 31,149 $26,677 $27,219 $21,173
Loss ratio ...............................ratio........................................... 34.3% 41.3% 39.2% 37.9% 38.0%
34.6%
LAE ratio ................................ratio............................................ 21.2% 22.5% 16.9% 15.6% 11.6%
11.5%
Expense ratio ............................ratio........................................ 32.2% 38.0% 39.9% 43.5% 39.7%
48.0%
--------- --------- --------- --------- ----------------- -------- --------
Combined ratio ...........................ratio....................................... 87.7% 101.8% 96.0% 97.0% 89.3%
94.1%
========= ========= ========= ========= ================= ======== ========
Invested assets and cash ................. $ 108,523 $ 60,908 $ 57,642 $ 46,670 $ 30,727cash............................. $100,868 $108,523 $60,908 $57,642 $46,670
Goodwill, net of amortization ............accumulated amortization............ 89,856 6,048 -- -- --
--
Total assets .............................assets......................................... 287,567 167,330 86,735 81,931 68,117
36,926
Loss and loss expense payable ............expenses payable....................... 50,655 41,099 37,002 34,661 29,528
14,107
Total liabilities ........................liabilities.................................... 139,657 76,008 59,967 58,100 50,304
23,895
Total Shareholders' equity ...............shareholders' equity........................... 147,910 91,322 26,768 23,580 18,401 13,031
2018
2219
ITEM 7. MANAGEMENT'S7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding of IASI'sthe
Company's financial position and results of operations for each of the years
ended December 31, 1997, 1996 1995 and 1994.1995. This discussion should be read in
conjunction with IASI'sthe Company's consolidated and combined financial statements
and notes thereto included herein. In accordance with IASI's intent to sellDuring fiscal 1997, the Company continued its
environmental
services operations,strategic acquisition program, purchasing the businesses of 39 complementary
companies. With one immaterial exception, each of the acquisitions was accounted
for as a purchase, and accordingly, the operating results of the acquired
companies have been included in Century's consolidated and combined financial
statements since their date of acquisition. The results of operations related to
suchthe Company's environmental services operations have been reflected as a
discontinued operation in IASI'sthe consolidated and combined financial statements.
See "Results of Operations --- Discontinued Operations."
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBERComparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
TO YEAR ENDED DECEMBERREVENUES
Total revenues increased to $108.2 million for the year ended December 31,
1997 from $35.8 million in 1996, representing an increase of $72.4 million, or
203%. The increase was primarily attributable to the Company's acquisition
activity in outsourced business services.
Business service fees and commissions increased to $63.4 million for the
year ended December 31, 1997 from $1.6 million in 1996, representing an increase
of $61.8 million. The increase was primarily attributable to the acquisitions
completed in 1997. Due to the majority of recent acquisitions having been
accounted for under the purchase method, the Company's consolidated financial
statements give effect to such acquisitions only from their respective
acquisition dates.
Premiums earned increased to $37.2 million for the year ended December 31,
1997 from $27.7 million in 1996, representing an increase of $9.5 million, or
34.7%. Gross written premiums increased to $59.8 million for the year ended
December 31, 1997 from $42.9 million in 1996, representing an increase of $16.9
million, or 39.3%. Net written premiums increased to $37.5 million for the year
ended December 31, 1997 compared to $31.1 million in 1996, representing an
increase of $6.4 million, or 20.4%. These increases were primarily attributable
to the growth in commercial liability premiums over 1996 levels, the
introduction of workers compensation coverage emanating from an August 1997
business transaction and the assumption of contract surety premiums under a
certain reinsurance agreement entered into in 1997.
Net investment income increased to $4.5 million for the year ended December
31, 1997 from $3.6 million in 1996, representing an increase of $960,000, or
26.9%. This increase was attributable to an increase in the annualized return on
investments to approximately 5.7% for the year ended December 31, 1997 from 5.3%
in 1996 and to an increase in the average investments outstanding to $74.2
million for the year ended December 31, 1997 from $64 million in 1996.
Net realized gain on investments increased to $3.0 million for the year
ended December 31, 1997 from $1.5 million in 1996. This increase was primarily
due to increased sales of equity securities.
Other income decreased to $13,000 for the year ended December 31, 1997 from
$1.4 million for the comparable period in 1996, representing a decrease of $1.4
million. The decrease was primarily attributable to non-recurring income from
the American Sentinel settlement.
EXPENSES
Total expenses increased to $90.2 million for the year ended December 31,
1997 from $29.7 million in 1996, representing an increase of $60.5 million. Such
increase was primarily attributable to the increase in operating expenses, which
reflects the impact of the Company's acquisitions made in 1997 and the
corresponding increase
19
20
of corporate staff and related integration costs. As a percentage of revenues,
total expenses increased to 83.3% for the year ended December 31, 1997 from
83.1% in 1996.
Operating expenses for the business services operations increased to $50.3
million for the year ended December 31, 1997 from $1.1 million in 1996,
representing an increase of $49.2 million. Such increase was attributable to
business services acquisitions completed in 1997. As a percentage of fees and
commissions, operating expenses increased to 79.3% for the year ended December
31, 1997 from 68.9% in 1996.
Loss and loss adjustment expenses increased to $20.7 million for the year
ended December 31, 1997 from $17.6 million in 1996, representing an increase of
$3.1 million, or 17.4%. Such increase was attributable to the increased premium
volume for liability coverages. As a percentage of premiums earned, loss and
loss adjustment expenses decreased to 55.5% for the year ended December 31, 1997
from 63.7% in 1996. Such decrease was the result of claims from prior years that
were settled and paid in 1996 for higher than reserved amounts.
Policy acquisition expenses increased to $9.7 million for the year ended
December 31, 1997 from $7.7 million in 1996, representing an increase of $2.0
million, or 25.6%. The increase corresponds directly to the increase in premium
volume. As a percentage of net written premiums, policy acquisition expenses
were 25.8% and 24.7% for the year ended December 31, 1997 and 1996,
respectively.
Corporate general and administrative expenses increased to $4.6 million for
the year ended December 31, 1997 from $302,000 in 1996. Such increase was
attributable to the creation of a corporate function in the fourth quarter of
1996 that did not exist prior to the reverse merger. Corporate general and
administrative expenses represented 4.2% of total revenues for the year ended
December 31, 1997.
Depreciation and amortization expense increased to $2.6 million for the
year ended December 31, 1997 from $320,000 in 1996, representing an increase of
$2.3 million. The increase is a result of the increase of goodwill amortization
resulting from the acquisitions completed by the Company in 1997. As a
percentage of total revenues, depreciation and amortization expense increased to
2.4% for the year ended December 31, 1997 from 0.8% in 1996. Such increase was
attributable to the implementation of the Company's acquisition strategy.
Other expenses decreased to $2.3 million for the year ended December 31,
1997 from $2.7 million in 1996, representing a decrease of approximately
$400,000. Such decrease was primarily attributable to the return of certain
ceding commissions, which are calculated based on historical experience in
relation to certain reinsurance contracts. The inclusion of the return of ceding
commissions as an other expense item conforms to insurance industry standards.
As a percentage of net written premiums, other expenses decreased to 6.2% for
the year ended December 31, 1997 from 8.5% in 1996. Such decrease reflects the
positive impact of the ceding commissions.
NET CORPORATE INTEREST INCOME
Net Corporate interest income increased to $965,000 for the year ended
December 31, 1997 from zero in 1996. Such increase was attributable to the
increase in cash and cash equivalent balances for the Company, excluding
specialty insurance and outsourced business services.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
RevenuesTotal revenues increased $4.9 million, or 16%, from $30.9 million in 1995
to $35.8 million in 1996 and consist of the following:
YEAR ENDED
DECEMBER 31,
------------------
DOLLAR
1996 1995 CHANGE
------- ------- ------
(in thousands)
Premiums earned............................................... $27,743 $26,962 $781
Net investment income......................................... 3,564 3,341 223
Net realized gains on investments............................. 1,529 166 1,363
Other income.................................................. 2,933 470 2,463
------- ------- ------
Total revenues................................................ $35,769 $30,939 $4,830
------- ------- ------
1996. Premiums earned increased approximately $800,000$700,000 on an
increase of $4.4$4.5 million in net written premiums in 1996. Much of the increase
in net written premiums was recorded in the second half of 1996, which directly
impacted IASI'sCentury's earned premium. On a gross written basis, IASICentury reported an
increase of $5.1$5.2 million in 1996, $5.0 million of which was generated through
brokerages and $800,000 of which was generated through general agencies. These
increases were offset by a $1.3 million decline in IASI'sCentury's remedial action
coverages.
IASICentury reported increases in net investment income of $223,000 and net
realized gains on investments of $1.5$1.4 million in 1996. Net investment income
grew 6.7% on invested assets of $68.6 million in 1996. IASI'sCentury's $1.4 million
increase in net realized gains on investments from $166,000 in 1995 to $1.5
million in 1996 is attributable to the gains realized on the sale of certain
equity investments.
20
21
Other income increased $2.5 million$949,000 in 1996 over 1995 and is attributable to
non-recurring income of $1.1 million from the American Sentinel settlement,
higher commission income of $400,000 and SMR revenues of $600,000 since its
acquisition.
Total expenses increased $3.7 million to $29.7 million in 1996 from $26.0
million in 1995. Such increase was primarily attributable to the changean increase in loss
and loss adjustment expenses ("LAE") of $2.5 million, and otheran increase in
operating expenses of $1.2
million.$1.1 million, which reflects the impact of the Company's
acquisitions made in 1996. While losses incurred have increased $844,000, loss
development from prior years increased $1.4 million and primarily relate to
property losses, which were higher than normal. In addition, IASICentury has
experienced increases in LAE to $6.2 million in 1996 from $4.5 million in 1995.
Such increases are attributable to IASI'sCentury's business mix, primarily its
casualty lines of business, and to the general litigation climate. The casualty
lines of business generally have higher loss adjustment costs relative to
premium dollars. Another factor affecting this increase is the court ruling in
the case of Montrose Chemical Corporation v. Admiral Insurance Company. The
California Supreme Court adopted a "continuous trigger of coverage" in cases
involving continuous and progressive third party damage claims. Insurance
companies are liable for claims occurring prior to the policy period for claims
which continued to progress during the course of the policy term. The exposure
to IASICentury does not have a residual impact on loss reserves but does have a
direct effect on IASI'sthe Company's loss adjustment reserving practices due to a
higher potential for claims handling and litigation costs.
Other expenses increased $1.2 million to $4.4 million in 1996 from $3.2
million in 1995 and primarily were affected by the initial consolidation of SMR
in December and other general corporate expenses incurred in the fourth quarter
of 1996. Other costs attributable to IASI's insurance services business improved
slightly to $2.9 million in 1996 from $3.1 million in 1995.
21
23
Income from continuing operations before taxes increased $1.2 million, or
23.9%, to $6.1 million in 1996 from $4.9 million in 1995 and net income
increased $915,000, to $4.4 million in 1996 from $3.5 million in 1995 primarily
for the reasons stated above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased $3.6 million, or 13% to $30.9 million in 1995
from $27.3 million in 1994. Premiums earned increased $3.6 million to $27.0
million in 1995 from $23.4 million in 1994, while net premiums declined $500,000
to $26.7 million in 1995 from $27.2 million in 1995. The timing of earned
premiums primarily accounted for the increase in total revenues. Timing
differentials reflect the changing mix of products to a substantially greater
concentration in the commercial lines and environmental surety businesses and a
decrease in the private passenger auto physical damage and miscellaneous surety
business. Commercial lines written premiums increased by $1.5 million but were
offset by a reduction in the automotive and miscellaneous surety business
following IASI's decision to withdraw from these markets. Also contributing to
the revenue increase was $864,000 in net investment income during 1995, a 35%
increase over 1994 revenues. Total revenue in 1994 included a gain of $807,000
attributable to the American Sentinel settlement.
Total expenses increased $3.5 million to $26.0 million in 1995 from
$22.5 million in 1994. Such increase was primarily a result of a $2.6 million
increase in loss and LAE. The increase in loss and LAE was a direct result of
increased premium revenue of $3.6 million. Acquisition expenses also increased
$2.3 million in 1995 from 1994. As a percentage of total revenue, total expenses
for 1995 and 1994 were 84% and 82%, respectively.
Primarily for the reasons stated above, 1995 income before income taxes
increased $47,000, or 1%, to $4.9 million in 1995 from $4.8 million in 1994 and
net income decreased $31,000, or 1%, to $3.5 million in 1995 from $3.5 million
in 1994.
BALANCE SHEET SUMMARY
The following tables set forth the key elements of IASI's balance
sheet:
ASSETS:
YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Total cash and invested assets................................ $108,523 $60,908 $57,642
Premiums receivable........................................... 7,013 4,467 5,201
Other assets.................................................. 51,794 21,360 19,088
-------- ------- -------
Total assets.................................................. $167,330 $86,735 $81,931
-------- ------- -------
LIABILITIES:
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
Total liability for loss/LAE.................................. $41,099 $37,002 $34,661
Unearned premium.............................................. 18,637 15,636 15,453
Other liabilities............................................. 16,272 7,329 8,382
------- ------- -------
Total liabilities............................................. $76,008 $59,967 $58,496
------- ------- -------
CAPITAL AND SURPLUS:
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Total shareholders' equity.................................... $91,322 $26,768 $23,580
22
24
COMBINED AND OPERATING RATIOS
The combined ratio is the sum of the loss ratio and expense ratio and is
the traditional measure of underwriting performance for insurance companies. The
operating ratio is the combined ratio less the net investment income ratio (net
investment income to net earned premium) excluding realized and unrealized
capital gains and is used to measure overall company performance.
The following table reflects the loss, LAE, expense, combined, net
investment and operation ratios of IASICentury on a generally accepted accounting
principles ("GAAP") basis for each of the years ended December 31, 1997, 1996
1995 and 1994:1995:
YEAR ENDED DECEMBER
31,
-------------------------------------------------
1997 1996 1995
1994
---- --------- ----
Loss ratio....................................................ratio............................................... 34.3 41.3 39.2
37.9
LAE ratio.....................................................ratio................................................ 21.2 22.5 16.9
15.6
Expense ratio.................................................ratio............................................ 32.2 38.0 39.9
43.5
----- ---- ----
Combined ratio................................................ratio........................................... 87.7 101.8 96.0
97.0
Net investment ratio..........................................ratio..................................... 12.2 12.9 12.4
10.6
Operating ratio...............................................ratio.......................................... 75.5 88.9 83.6 86.4
EXPENSESExpenses
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net writtenearned premiums on a GAAP basis. The statutory ratio
differs from the GAAP ratio as a result of different treatment of acquisition
costs. Expense ratios have been
favorably impacted by reinsurance contingencies.
INVESTMENTS AND INVESTMENT INCOME
Investments of IASI are restricted to certain investments permitted by OhioLiability for Losses and Utah insurance laws. IASI's investment policy has been established by IASI's
investment committee and is reviewed periodically. IASI has retained an
independent professional investment firm to manage its fixed income portion of
the investment portfolio pursuant to the investment policy and strategy.
IASI accounts for its investment securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which was adopted by the Financial
Accounting Standards Board (the "FASB"). Fixed maturity securities that IASI has
the positive intent and ability to hold to maturity are carried at amortized
cost. As IASI's fixed income securities mature, there can be no assurance that
IASI will be able to reinvest in securities with comparable yields. IASI's other
fixed maturity and all equity securities are classified as available-for-sale
and are carried at market value. The unrealized gains and losses as a result of
the valuation is reported as a separate component of shareholders' equity net of
appropriate deferred income taxes. IASI has no investments classified as trading
securities.
The following table sets forth IASI's investment income for each
of the years ended December 31, 1996, 1995 and 1994:
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Net investment income......................................... $3,564 $3,341 $2,477
Net realized gain on
investments................................................ 1,529 166 80
------ ------ ------
Total investment income....................................... $5,093 $3,507 $2,557
====== ====== ======
Investment yield.............................................. 5.31% 5.56% 4.78%
Net unrealized appreciation
(depreciation) of investments (net of tax)................. $3,696 $3,266 $(1,208)
23
25
LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLELoss Expenses Payable
As of December 31, 1996,1997, the liability for losses and LAE constituted 54%36.3%
of IASI'sCentury's consolidated liabilities. IASICentury has established reserves that
reflect its estimates of the total losses and LAE it will ultimately be required
to pay under insurance and reinsurance policies. Such reserves include losses
that have been reported but not settled and losses that have been incurred but
not reported ("IBNR"). Loss reserves are established on an undiscounted basis
after reductions for deductibles and estimates of salvage subrogation.
21
22
For reported losses, IASICentury establishes reserves on a "case" basis within
the parameters of coverage provided in the related policy. For IBNR losses,
IASICentury estimates reserves using established actuarial methods. Case and IBNR
loss reserve estimates reflect such variables as past loss experience, social
trends in damage awards, changes in judicial interpretation of legal liability
and policy coverages, and inflation. IASICentury takes into account not only
monetary increases in the cost of what is insured, but also changes in societal
factors that influence jury verdicts and case law and, in turn, claim costs.
IASI'sCentury's loss reserves have been certified in accordance with the requirements
of the National Association of Insurance Commissioners.
The consolidated and combined financial statements of IASICentury include the
estimated liability for unpaid losses and LAE of IASI'sCentury's insurance operations.
Reserves for unpaid losses covered by insurance policies and bonds consist of
reported losses and IBNR losses. These reserves are determined by claims
personnel and the use of actuarial and statistical procedures and they represent
undiscounted estimates of the ultimate cost of all unpaid losses and LAE through
year end. Although management uses many resources to calculate reserves, a
degree of uncertainty is inherent in all such estimates. Therefore, no precise
method for determining ultimate losses and LAE exist. These estimates are
subject to the effect of future claims settlement trends and are continually
reviewed and adjusted (if necessary) as experience develops and new information
becomes known. Any such adjustments are reflected in current operations. ActivitySee
Footnote 6 to the Consolidated and Combined Financial Statements contained
herein for the activity in the liability for unpaid losses and loss expense is
summarizedexpenses for
the years ended December 31, 1997, 1996, and 1995.
ANALYSIS OF LOSS AND LAE DEVELOPMENT
The historical pattern of redundancy might not be indicative of experience
which may emerge in the following table:future.
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Balance at January 1.......................................... $37,002 $34,661 $29,528
Less insurance recoverables................................ (8,914) (9,383) (8,505)
------- ------ -------
Net balance at January 1...................................... $28,088 $25,278 $21,023
------- ------ -------
Incurred related to:
Current year............................................... 17,216 17,297 14,753
Prior years................................................ 408 (2,180) (2,259)
------- ------ -------
Total incurred................................. 17,624 15,117 12,494
------- ------ -------
Paid related to:
Current year............................................... 3,684 5,963 4,269
Prior years................................................ 9,043 6,344 3,970
------- ------ -------
Total paid..................................... 12,727 12,307 8,239
------- ------ -------
Net balance at end of period.................................. 32,985 28,088 25,278
Plus reinsurance recoverables.............................. 8,114 8,914 9,383
------- ------ -------
Balance at end of period...................................... $41,099 37,002 $34,661
======= ====== =======
ANALYSIS OF LOSS AND LAE DEVELOPMENT
Year Ended December 31,
------------------------------------------------------------------------------------------------
1986--------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----1997
------ ------ ------ ------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Net liability for
losses and loss
expenses................. $2,276 3,484 7,202 8,168 10,428 12,775 14,107 21,023 25,278 28,088 32,985expenses........... $3,484 $7,202 $8,168 $10,428 $12,775 $14,107 $21,023 $25,278 $28,088 $32,985 $42,399
Cumulative amount of
net liability paid
through:
One year later............ 1,262later... 1,566 2,985 2,404 2,404 2,811 3,026 4,131 6,309 8,785 8,773 --
Two years
later........... 1,943later......... 2,172 3,876 3,433 4,090 4,894 3,848 7,503 11,161 14,478
Three years
later......... 2,205 2,623 4,398 4,322 5,239 5,372 4,786 9,346 13,936
Four years
later.......... 2,482later......... 2,759 4,799 4,984 5,184 6,010 5,119 10,620
Five years
later.......... 2,562later......... 2,907 5,140 4,880 5,352 6,102 5,550
Six years
later........... 2,677later......... 2,927 5,147 4,953 5,352 6,192
Seven years
later......... 2,693 2,935 5,152 4,947 5,366
Eight years
later......... 2,702 2,935 5,135 4,944
Nine years
later.......... 2,702later......... 2,917 5,128
Ten years
later........... 2,700later......... 2,909
22
23
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(in thousands)
The retroactively
reestimated net
liability for loss
and loss expenses
as of:
One year later............ 2,888later... 4,277 7,406 8,388 10,674 12,003 12,587 18,910 23,049 28,246 31,829 --
Two years
later........... 3,375later......... 4,032 7,445 8,504 9,239 10,877 9,829 17,531 22,193 27,059
Three years
later......... 3,132 4,042 7,419 7,025 8,183 8,419 8,899 16,174 20,686
Four years
later.......... 3,056later......... 4,028 6,365 6,668 6,631 8,675 7,822 14,801
Five years
later.......... 3,039later......... 3,420 6,311 5,638 6,320 7,467 6,744
Six years
later........... 2,849later......... 3,406 5,534 5,243 5,823 6,679
Seven years
later......... 2,829 3,009 5,308 5,133 5,532
Eight years
later......... 2,708 2,949 5,230 4,967
Nine years
later.......... 2,713later......... 2,926 5,138
Ten years
later........... 2,706
------ ----- ----- ----- ----- ------ ------ ------ ------ ------ ------later......... 2,915
------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Net cumulative
redundancy
(deficiency)................redundancy......... $ (430) 558 1,972 3,035 4,605 5,308 6,285 4,849 3,085 (158)569 $2,064 $3,201 $ 4,896 $ 6,096 $ 7,363 $ 6,222 $ 4,592 $ 1,029 $ 1,156 $ --
====== ===== ===== ===== ===== ====== ====== ====== ====== ====== ============= ======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Gross
liability --- end of
year ......................................................................year............... $34,661 37,002 41,099$37,002 $41,099 $50,655
Reinsurance
recoverable ............................................................................recoverable........ 9,383 8,914 8,114 ------ ------ ------8,256
-------- -------- -------- --------
Net liability --- end
of year ........................................................................ 25,278 28,088 32,985
====== ====== ======year............ $25,278 $28,088 $32,985 $42,399
======== ======== ======== ========
The data set forth in the table above does not reflect the adoption of SFAS
No. 113.
DISCONTINUED OPERATIONS
IASI's results of operations related to its environmental services
operations have been reflected as a discontinued operation in IASI's
consolidated and combined financial statements as a result of IASI's execution
of the non-binding Letter of Intent. See Note 15 to the Consolidated and
Combined Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
IASIFinancial Condition
Century had cash and investments, excluding mortgage loans, of $99.0
million, $104.8 million, $57.5 million, and $54.7$57.5 million at December 31, 1997, 1996 1995 and 1994,1995,
respectively. The $47.3 million increase from 1995 to 1996 is a result of
IASI'sCentury's generation of proceeds from stock issuances from exercises of
outstanding options and warrants and the Private
24
26 Placement (defined herein),
profits and additional loss reserves on an increasing volume of liability
coverages which have slower payout patterns than property coverages.
Net cash provided by operationsoperating activities for the years ended December 31,
1997, 1996, and 1995 and 1994 was $4.7 million, $13.2 million, $3.6 million and $9.7$3.6 million,
respectively. These amounts were adequate to meet allthe majority of IASI'sCentury's
capital expenditure, operating and acquisition costs and resulted primarily from
earnings and the timing of reinsurance contingency transactions.
IASI'sNet cash provided by (used in) financing activities provided net cash for the years ended
December 31, 1997, 1996, and 1995 and 1994 ofwas $15.6 million, $35.7 million, $5.6 million and $1.4$(5.6)
million, respectively. During 1996, IASICentury realized approximately $38.0$38.2 million
in cash proceeds from a private placement and from stock issuances, offset in
part by dividends paid to Alliance Holding by CSC and CSU prior to the Merger
Transactions.
SOURCES OF CASH
IASI'sSources of Cash
The Company's principal source of revenue from its business outsourcing
services operation is the collection of fees from professional services rendered
to its clients in the areas of information technology consulting, tax return
preparation and compliance, and business valuations, as well as other areas that
have been previously discussed.
Century's principal source of revenue from its specialty insurance services
operations consists of insurance and reinsurance premiums, investment income,
commission and fee income, and proceeds from sales and maturities of investment
securities. Premiums written become premiums earned for financial statement
purposes as the premium is earned incrementally over the term of each insurance
policy and after deducting the amount of premium ceded to reinsurers pursuant to
reinsurance treaties or agreements. The property and liability operation
23
24
of IASICentury generates positive cash flow from operations as a result of premiums
being received in advance of the time when the claim payments are made.
The companies of the CSC Group are subject to regulation and supervision by
state insurance regulatory agencies, applicable generally to each insurance
company in its state of incorporation. Such regulations limit the amount of
dividends or distributions by an insurance company to its shareholders. If
insurance regulators determine that payment of a dividend or any other payment
to an affiliate (such as a payment under a tax allocation agreement) would,
because of the financial condition of the paying insurance company or otherwise,
be detrimental to such insurance company's policyholders or creditors, the
regulators may block payment of such dividend or such other payment to the
affiliates that would otherwise be permitted without prior approval.
Ohio law limits the payment of dividends to IASI.Century. The maximum dividend
that may be paid without prior approval of the Director of Insurance of the
State of Ohio is limited to the greater of the statutory net income of the
preceding calendar year or 10% of total statutory shareholder's equity as of the
prior December 31.
AsThe Company has a result, the maximum dividend CSC may pay to IASI in 1997
without prior approval of the Director of Insurance of the State of Ohio is
approximately $2.6 million.
IASI's principal source of revenue from its business outsourcing
services operation is the collection of fees from professional services rendered
to its clients in the areas of information technology consulting, tax return
preparation and compliance, and business valuations, as well as other areas that
have been previously discussed.
In May 1995, IASI secured a $6.0$50 million revolving credit facility with a United
States commercial bank to provide IASI with additional liquidity and working
capital. This facility provides for borrowings at the prime lending rate plus
0.5% or adjusted three-month LIBOR rate plus 2.5%Bank of
America, National Trust & Savings Association ("Bank of America"), which would be 8.75% and
[7.95%], respectively, atas Agent. At
December 31, 1996 and will mature in 1998. Up to $4.51997, approximately $8 million ofwas outstanding under such credit
facility. The interest rate under the credit facility is, available forat the issuanceCompany's
option, either: (a) the higher of standby letters(i) 0.50% per annum above the latest Federal
Funds Rate or (ii) the rate of credit. At December 31, 1996 IASI had issued $2.4 millioninterest in standby letterseffect from time to time announced by
the Bank of credit and had no cash borrowing under the credit facility.America, San Francisco, California office as its "reference rate,"
or (b) a floating rate based on certain offshore dollar interbank market rates.
The credit facility containsrequires the Company to comply with various affirmative and
negative covenants, which, amongincluding (a) observance of various financial and other
things, restrictcovenants, (b) restrictions on additional indebtedness, (c) restrictions on
dividend payments and (d) restrictions on certain liens, mergers, dispositions
of assets and investments. The Company must also maintain a net worth equal to
the paymentsum of dividends and require(a) $88 million plus (b) 70% of subsequent net income plus (c) the
maintenanceproceeds of certain
financial ratios. Borrowings under the credit facility are secured by all of
IASI's United States based assets related to its environmental services
operations.any equity security offerings.
In December 1996, IASICentury issued and sold 3,251,888 units of IASICentury (the
"Units") for $9.00 per Unit (the "Private Placement"). Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common Stock
of IASICentury at an exercise price of $11.00 per share exercisable, in whole or in
part, for a three year period from the date of issuance. The Private Placement
resulted in net proceeds of approximately $27.6$27.7 million, after deducting the
placement agent fee and other estimated expenses associated with the Private
Placement.
In addition, Westbury (Bermuda) Ltd. formerly known as MGD Holdings
("Westbury"); the Harve A. Ferrill Trust U/A 12/31/69 (the "Ferrill Trust"); and
WeeZor I Limited Partnership ("WeeZor"), affiliates of each of Messrs. Michael
G. DeGroote, Chairman of the Board of IASI,Century; Harve A. Ferrill and Richard C.
Rochon, directors of IASI,Century, respectively, have entered into
agreements to purchasepurchased an aggregate of 616,611
Units, subject to stockholder
approval. On January 6, 1997, theUnits. Upon issuance of such Units was approved by written
consentthe second tranche of the holders of a majority of the outstanding shares of Common Stock.
In accordance with Rule 14c-2 under the Exchange Act, on or about April 1997,
IASI will distribute a Schedule 14C Information Statement (the "Information
Statement") to holders of IASI's Common Stock as of the date of such written
consent. The Information Statement will be used to notify such holders of Common
Stock of the action by written consent approving the issuance of Units, to MGD
Holdings, the Ferrill Trust and WeeZor. In accordance with the requirements of
the Exchange Act, the issuance of Units to MGD Holdings and Messrs. Ferrill and
Rochon will close no earlier than
25
27
20 days following the distribution of the Information Statement to such holders.
Upon the closing of the issuance of such Units, IASI will receiveCentury received an
additional $5.3 million in proceeds.
On February 6, 1998, the Company accepted subscriptions for 5,000,000
shares of the Company's Common Stock, consisting of 3,800,000 newly-issued
shares and 1,200,000 shares of outstanding Common Stock offered by certain
selling shareholders. The Company received proceeds of approximately $41 million
for the newly issued shares. Such proceeds will be used for general corporate
purposes, including acquisitions. Additionally, the selling shareholders either
exercised or caused to be exercised an aggregate of 1.4 million warrants,
resulting in additional proceeds to the Company of $3.7 million. A subscription
for 500,000 shares of the 5,000,000 shares was received from Westbury. The
purchase of these shares by an affiliate of Mr. DeGroote, who is Chairman of the
Board of Directors, President and Chief Executive Officer of Century, is
conditioned, among other things, to shareholder approval at the Annual Meeting
scheduled for April 30, 1998.
The Company had 22,379,387 warrants outstanding at December 31, 1997 with
exercise prices ranging from $1.075 to $13.06 which expire at various times
through October 18, 2000. If all warrants were exercised during this timeframe,
the Company would receive proceeds of approximately $118.4 million.
24
25
USES OF CASH AND LIQUIDITY OUTLOOK
OPERATIONS. IASI'sCentury made capital expenditures from continuing operations
totaledof $2,284,000, $286,000 $223,000 and
$340,000$223,000 for the years ended December 31, 1997, 1996 1995 and 1994,1995, respectively,
which included expenditures for fixed assets for normal replacement, compliance
with regulations and market development. During the year ended December 31,
1996, IASI1997, Century funded capital expenditures from cash on hand and operating cash
flow. IASICentury anticipates that during 1997,1998, it will continue to fund
expenditures from operating cash flow supplemented by borrowing under its
revolving credit facility, as necessary. Management believes that IASICentury
currently has sufficient cash and lines of credit to fund current operations and
expansion thereof.
Cash used in investing activities for the years ended December 31, 1997,
1996 1995 and 19941995 primarily came as the result of differences in the purchases and
sales of investments.
IASIinvestments and the effect of certain business acquisitions.
Century is required to establish a reserve for unearned premiums. IASI'sCentury's
principal costs and factors in determining the level of profit isare the
difference between premiums earned and losses, LAE and agent commissions. Loss
and LAE reserves are estimates of what an insurer expects to pay on behalf of
claimants. IASICentury is required to maintain reserves for payment of estimated
losses and LAE for both reported claims and for IBNR claims. Although the
ultimate liability incurred by IASICentury may be different from current reserve
estimates, management believes that the reserves are adequate.
IASICentury believes its cash flow from operations and available financial
resources provide for adequate liquidity to fund existing and anticipated
capital and operational requirements as well as to fund future growth and
expansion. Management is not aware of any current recommendations by regulatory
authorities that, if implemented, could have a material impact on IASI'sCentury's
liquidity, capital resources and operations.
YEAR 2000. The Company's business depends in part upon its ability to
store, retrieve, process and manage significant databases and periodically, to
expand and upgrade its information processing capabilities. The Company
recognizes the need to ensure its operations will not be adversely impacted by
Year 2000 software failures. The Company has reviewed and continues to review,
on a regular basis, its computer equipment and software systems with regard to
Year 2000 problems. The Company has formulated a plan and methodology for
addressing Year 2000 problems and is currently implementing such plans.
ACQUISITIONS. IASI'sCentury's strategy is to expand aggressively expand its specialty
insurance and business outsourcing services operations through internal growth
and by acquiring and integrating existing businesses. IASICentury makes its decision
to acquire or invest in businesses based on financial and strategic
considerations. The Company normally funds its acquisitions through a
combination of restricted Common Stock and cash. See "Business and
Properties -- Business Strategy." BusinessesThe businesses acquired to date, with one
exception, have been accounted for under the purchase method of accounting and,
accordingly, are included in the financial statements from the date of
acquisition.
On November 14, 1997, the Company filed two shelf registration statements
with the Securities and Exchange Commission to register an aggregate of
7,729,468 shares of Common Stock to be issued from time to time in connection
with acquisitions and up to an aggregate of $125,000,000 of debt securities,
Common Stock or Warrants to be issued and sold from time to time by the Company.
The registration statements became effective in December 1997. To date, the
Company has not issued any securities under either registration statement.
Management believes that IASICentury currently has sufficient resources,
including cash on hand, cash flow from operating activities, credit facilities
and access to financial markets to fund current and planned operations, service
any outstanding debt and make certain acquisitions. However, substantial
additional capital may be necessary to fully implement IASI'sCentury's aggressive
acquisition program. There can be no assurance that additional financing will be
available on a timely basis, if at all, or that it will be available in the
amounts or on terms acceptable to IASI.
STOCK REPURCHASE PROGRAM
In April 1995, IASI's Board of Directors authorized IASI to repurchase
up to 500,000 shares or 4.6% of Common Stock during 1995 as deemed appropriate
by management and authorized an additional repurchase of 500,000 shares or 4.6%
of Common Stock in February 1996. Repurchases were effected at prevailing market
prices from time to time on the open market prior to the negotiation of the
Merger Transactions. The last repurchase was effected by IASI on March 4, 1996
and as of such date IASI had repurchased approximately 695,842 shares of Common
Stock for an aggregate cost of approximately $1,040,000. The repurchased shares
have been retired and the repurchase program has been discontinued.Century.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains various"forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact
25
26
included in this Annual Report, including without limitation, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy and plans and
objectives for future performance are forward-looking statements and
information that are based on management's belief as well as assumptions made
by, and information currently available to, management. Suchstatements.
Forward-looking statements are typically punctuatedcommonly identified by words orthe use of such terms and
phrases such as "anticipate,"intends," "estimate,"estimates," "expects," "projects," "management believes,"anticipates,"
"IASI believes""foreseeable future," "seeks," and words or phrasesphases of similar import. Such
statements are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Among the key factors that may have a
direct bearing on IASI'sCentury's results of operations and financial condition are:
(i) demand for IASI's services;Century's ability to grow through acquisitions of strategic and
complementary businesses; (ii) IASI'sCentury's ability to finance such acquisitions;
(iii) Century's ability to manage growth; (iv) Century's ability to integrate
the operations of acquired businesses; (iii) IASI's(v) Century's ability to expand into new
markets; (iv) the consummation of IASI's dispositionattract and
retain experienced personnel; (vii) Century's ability to store, retrieve,
process and manage significant databases; (vii) Century's ability to manage
pricing of its environmental
services operations; (v) environmental liabilities to which IASI may become
subject in the future which are not covered by an indemnity or insurance; (vi)insurance products and adequately reserve for losses; (ix) the
impact of current and future laws and governmental regulations affecting
IASI'sCentury's operations; (vii) competitive practices in the specialty insurance and
bonding industries; (viii) competitive practices in the reinsurance markets
utilized by IASI; (ix) judicial, legislative, and regulatory changes of law
relating to risks covered by IASI or to the operations of insurance companies in
general; (x) market fluctuations in the values or 26
28
returns on
assets in IASI'sCentury's investment portfolios; (xi) pricingportfolios.
ITEM 7A.
QUANTITATIVE INFORMATION ABOUT MARKET RISK. The Company does not engage in
trading market risk sensitive instruments. Neither does the Company purchase as
investments, hedges or for purposes "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has issued
no debt instruments, entered into no forward or futures contracts, purchased no
options and entered no swaps.
QUALITATIVE INFORMATION ABOUT MARKET RISK. The Company's primary market
risk exposure is that of IASI
insurance products; and (xii) adverse loss development.interest rate risk. A change in the Federal Funds Rate,
or the Reference Rate set by the Bank of America (San Francisco), would affect
the rate at which the Company could borrow funds under its Credit Facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.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. CHANGES9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Described in IASI's Form 8-K dated February 19, 1997.NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.REGISTRANT
The information appearing under the caption "Election of Directors" in IASI'sthe
Company's definitive proxy statement (the "Proxy Statement") relating to the
19971998 Annual Stockholders Meeting (the "Annual Meeting"), is incorporated herein
by reference. The information regarding directors and executive officers of IASIthe
Company is contained in Part I of this Annual Report under a separate item
captioned "Executive"Directors and Executive Officers of IASI.Century Business Services, Inc."
ITEM 11. EXECUTIVE COMPENSATION.COMPENSATION
The information appearing under the caption "Executive Compensation" in the
Proxy Statement relating to the Annual Meeting is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.MANAGEMENT
The information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
26
27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.TRANSACTIONS
The information appearing under the captions "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.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
IASI (filed as Exhibit 3.1 to IASI's
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company (filed as
Exhibit 3.1 to the Company's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference).
3.2 Certificate of Amendment of the Certificate of Incorporation of the Company
dated October 18, 1996 (filed as Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated herein by
reference).
3.3* Certificate of Amendment of the Certificate of Incorporation of the Company
effective October 23, 1997.
3.4 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form 10, file no. 0-25890, and incorporated
herein by reference).
4.1 Form of Stock Certificate of Common Stock of the Company (filed as Exhibit 4.1
to the Company's Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference).
4.2 Promissory Note, dated October 18, 1996, in the original aggregate principal
amount of $4.0 million issued by the Company payable to Alliance Holding (filed
as Exhibit 99.7 to the Company's Current Report on Form 8-K dated October 18,
1996, and incorporated herein by reference).
4.3* Form of Warrant for the purchase of the Company's Common Stock.
10.1 Credit Agreement dated as of October 2, 1997 by and among Century and its
Subsidiaries, as Borrowers, and Bank of America National Trust and Savings
Association, as Agent and Letter of Credit Bank (filed as Exhibit 10.1 to the
Company's Report on Form 10-Q for the period ended September 30, 1997, and
incorporated herein by reference).
3.2* Certificate of Amendment of the Certificate of Incorporation
of IASI dated October 18, 1996.
27
29
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI'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 IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
28
30
Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------
10.2 Agreement and Plan of Merger by and among Century Business Services, Inc.,
Republic/CSA Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to the Company's Definitive
Schedule 14C Information Statement dated September 23, 1996 and incorporated
herein by reference).
10.3 Amendment No. 1 to Agreement and Plan of Merger by and among Century Business
Services, Inc. Republic/CSA Acquisition Corporation, Republic/CSU Acquisition
Corporation, Alliance Holding, CSC and CSU (filed as Appendix IV to the
Company's Definitive Schedule 14C Information Statement dated September 23,
1996 and incorporated herein by reference).
10.4 Amendment No. 2 to Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation, Alliance
Holding, CSC and CSU (filed as Appendix V to the Company's Definitive Schedule
14C Information Statement dated September 23, 1996 and incorporated herein by
reference).
10.5 Agreement and Plan of Merger by and among Century Business Services, Inc.,
Century/SMR Acquisition Co., SMR and its shareholders dated November 30, 1996
(filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference).
10.6 1996 Employee Stock Option Plan (filed as Appendix I to the Company's Proxy
Statement 1997 Annual Meeting of Stockholders dated April 1, 1997 and
incorporated herein by reference).
10.7* Amendment to 1996 Employee Stock Option Plan, effective December 8, 1997.
10.8 Agents 1997 Stock Option Plan (filed as Appendix II to the Company's Proxy
Statement 1997 Annual Meeting of Stockholders dated April 1, 1997 and
incorporated herein by reference).
10.9* Subscription Agreement by and between Century Business Services, Inc. and
Westbury (Bermuda) Ltd., dated February 6, 1998.
21.1* List of Subsidiaries of Century Business Services, Inc.
24.1* Consent of KPMG Peat Marwick LLP.
- ---------------
* Indicates documents filed herewith.
(b) Reports on Form 8-K
IASICentury Business Services, Inc. filed the following Current Reports on
Form 8-K during the fourth
quarter of 1996:1997:
Current Report on Form 8-K dated October 18, 1996.February 19, 1997, as amended on Form
8-K/A filed on April 2, 1997.
Current Report on Form 8-K dated December 30, 1996.April 3, 1997.
Current Report on Form 8-K dated April 21, 1997.
Current Report on Form 8-K dated July 23, 1997, as amended on Form
8-K/A dated October 3, 1997.
28
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Century has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTURY BUSINESS SERVICES, INC.
(Registrant)
By: /s/ GREGORY J. SKODA
------------------------------------
Gregory J. Skoda
Executive Vice President
February 17, 1998
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below on this Annual Report hereby constitutes and appoints Michael G. DeGroote
and Gregory J. Skoda and each of them, with full power to act without the other,
his true and lawful attorney-in-fact and agent, with full power of substitution
for him and his name, place and stead, in any and all capacities (until revoked
in writing), to sign any and all amendments to this Annual Report of Century
Business Services, Inc. and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that each of said attorneys-in-fact and agents, 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 the following persons on
behalf of Century Business Services, Inc. and in the capacities and on the date
indicated above.
/s/ MICHAEL G. DEGROOTE /s/ JOSEPH S. DIMARTINO
- ---------------------------------------- ----------------------------------------
Michael G. DeGroote Joseph S. DiMartino
Chief Executive Officer, President, Director
Chairman of the Board and Director
/s/ GREGORY J. SKODA /s/ HARVE A. FERRILL
- ---------------------------------------- ----------------------------------------
Gregory J. Skoda Harve A. Ferrill
Executive Vice President Director
and Director
/s/ CHARLES DELL HAMM, JR. /s/ HUGH P. LOWENSTEIN
- ---------------------------------------- ----------------------------------------
Charles Dell Hamm, Jr. Hugh P. Lowenstein
Chief Financial Officer Director
(Principal Financial and Accounting
Officer)
/s/ RICK L. BURDICK /s/ RICHARD C. ROCHON
- ---------------------------------------- ----------------------------------------
Rick L. Burdick Richard C. Rochon
Director Director
29
31
INTERNATIONAL ALLIANCE30
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report.................................................F-2Report........................................................ F-2
Consolidated and Combined Balance Sheets as of
December 31, 19961997 and 1995.............................................F-31996....................................................... F-3
Consolidated and Combined Statements of Income For the Years Ended
December 31, 1997, 1996 1995 and 1994...........................F-41995................................................. F-4
Consolidated and Combined Statements of Shareholders' Equity For the Years Ended
December 31, 1997, 1996 1995 and 1994...........................F-51995................................................. F-5
Consolidated and Combined Statements of Cash Flows For the Years Ended
December 31, 1997, 1996 1995 and 1994...........................F-61995................................................. F-6
Notes to the Consolidated and Combined Financial Statements.............................................................F-7Statements............................. F-7
Schedule I --- Summary of Investments -- Other Thanthan Investments in Related
Parties as of December 31, 1996.....................F-31
Schedule IV - Reinsurance
Years Ended December 31, 1996, 1995 and 1994..........................F-321997.................................................. F-28
Schedule III --- Supplementary Insurance Information For the Years Ended
December 31, 1997, 1996 1995 and 1994..................F-331995................................................. F-29
Schedule IV -- Reinsurance For the Years Ended
December 31, 1997, 1996 and 1995................................................. F-30
F-1
3231
INDEPENDENT AUDITORS' REPORT
----------------------------
BOARD OF DIRECTORS
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC.
We have audited the accompanying consolidated and combined financial
statements of International AllianceCentury Business Services, Inc. and Subsidiaries as listed in the
accompanying index on page F-1. In connection with our audits of the
consolidated and combined financial statements, we have also audited the
financial statement schedules as listed in the accompanying index on page F-1.
These consolidated and combined financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated and combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the financial position of
International AllianceCentury Business Services, Inc. and Subsidiaries at December 31, 19961997 and 1995,1996,
and the results of their operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996,1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic consolidated and combined financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
March 25, 1997February 17, 1998
F-2
3332
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1997 AND 1996
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
1997 1996
AND 1995
1996 1995
------------- --------------
ASSETS-------- --------
ASSETS
Cash and cash equivalents.............................................. $ 21,148 $ 39,874
Accounts receivable, less allowance for doubtful accounts of $1,472 and
$0, respectively..................................................... 32,235 598
Premiums receivable, less allowance for doubtful accounts of $281 and
$284, respectively................................................... 7,812 7,013
Investments (Note 4):
Fixed maturities held to maturity, at amortized cost $cost................. 14,528 15,481 $ 15,309
Securities available for sale, at fair value:
Fixed maturities 35,471 33,153
Equity securities 9,213 5,426value......................... 59,138 44,684
Mortgage loansloans....................................................... 1,839 3,685
3,393
Short-term investmentsinvestments............................................... 4,215 4,799
843
Other long-term investments - 90
------------- ---------------------- --------
Total investmentsinvestments................................................. 79,720 68,649 58,214
Cash and cash equivalents 39,874 2,694
Premiums receivable, less allowance for doubtful
accounts of $284 and $138, respectively 7,013 4,467
Deferred policy acquisition costs (Note 8)............................. 4,478 4,345 3,428
Reinsurance recoverables (Note 7)...................................... 15,215 11,185 12,647
Excess of cost over net assets of businesses acquired, , net of
accumulated amortization of $1,297 and $33, respectively (Note 2).... 89,856 6,048 -
Net assets held for disposal (Note 15)................................. -- 22,999
-Notes receivable (Note 15)............................................. 16,579 --
Other assets 7,217 5,285
------------- --------------assets........................................................... 20,524 6,619
-------- --------
TOTAL ASSETSASSETS........................................................... $287,567 $167,330
======== ========
LIABILITIES
Accounts payable....................................................... $ 167,3309,437 $ 86,735
============= ==============
LIABILITIES136
Losses and loss expenses payable (Note 6) $.............................. 50,655 41,099
$ 37,002
Unearned premiumspremiums...................................................... 22,656 18,637
15,636
NoteNotes payable, bank debt and capitalized leases (Note 11).............. 20,312 3,211 47
Income taxes (Note 10)................................................. 2,958 1,994
1,375
Accrued expensesexpenses....................................................... 27,167 5,355
2,672
Other liabilities 5,712 3,235
------------- --------------liabilities...................................................... 6,472 5,576
-------- --------
TOTAL LIABILITIESLIABILITIES...................................................... 139,657 76,008
59,967
------------- ---------------------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (Note 5)
Authorized --- 100,000,000 shares
Issued and outstanding -- 41,464,099 shares at December 31, 1996;
- 20,000,000 shares at December 31, 1995
Issued and outstanding -1997;
-- 33,764,506 shares at December 31, 1996;
- 14,760,000 shares at December 31, 19951996... 415 338 148
Additional paid-in capitalcapital............................................. 127,517 80,446
19,146
Retained earningsearnings...................................................... 18,372 6,842
4,208
Net Unrealizedunrealized appreciation of investments (net of tax)................ 1,606 3,696
3,266
------------- ---------------------- --------
TOTAL SHAREHOLDERS' EQUITYEQUITY............................................. 147,910 91,322
26,768
------------- ---------------------- --------
Commitments and contingencies (Note 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 167,330 $ 86,735
============= ==============EQUITY............................. $287,567 $167,330
======== ========
See the accompanying notes to the consolidated and combined financial
statements.
F-3
34
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(In thousands, except per share data)33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
AND 1994
1996 1995 1994
-------------- ------------- ----------------- ------- -------
Revenues:
Business services fees and commissions..................... $ 63,411 $ 1,606 $ --
Specialty insurance services (regulated):
Premiums earned (Note 7) $ 27,743 $................................ 37,238 27,651 26,962 $ 23,368
Net investment income (Note 4).......................... 4,524 3,564 3,341
2,477
Net realized gaingains on investments (Note 4).............. 3,044 1,529 166
80
Other income 2,933income............................................ 13 1,419 470
1,385
-------------- ------------- --------------
Net revenues--------- -------- --------
Total revenues........................................ 108,230 35,769 30,939
27,310
-------------- ------------- --------------
Expenses:
Operating expenses -- business services.................... 50,277 1,107 --
Losses and loss adjustment expenses (Note 7)............... 20,682 17,624 15,117 12,494
Policy acquisition expenses (Note 8)....................... 9,670 7,699 7,774
5,428Corporate general and administrative expenses.............. 4,578 302 --
Depreciation and amortization expenses..................... 2,612 320 --
Other expenses 4,384expenses............................................. 2,331 2,655 3,157
4,544
-------------- ------------- ----------------------- -------- --------
Total expensesexpenses........................................ 90,150 29,707 26,048
22,466
-------------- ------------- --------------Income from continuing operations before net corporate
interest income and income tax expense..................... 18,080 6,062 4,891
Net corporate interest income................................ 965 -- --
--------- -------- --------
Income from continuing operations before income tax
expenseexpense.................................................... 19,045 6,062 4,891 4,844
Income tax expense (Note 10)................................. 6,280 1,640 1,422
1,344
-------------- ------------- ----------------------- -------- --------
Income from continuing operationsoperations............................ 12,765 4,422 3,469
3,500
Loss from operations of discontinued operationsbusiness (net of income
tax expense (benefit) of $91)$(316), $91 and $0,
respectively).............................................. 663 38 --
Loss on disposal of discontinued business (net of income tax
benefit of $305 in 1997) (Note 15) (38) - -
-------------- ------------ -------------......................... 572 -- --
--------- -------- --------
Net incomeincome............................................ $ 11,530 $ 4,384 $ 3,469
$ 3,500
============== ============= ======================= ======== ========
Earnings per common and common share equivalents (Note 3):
Primary:Basic:
Income from continuing operationsoperations....................... $ 0.210.35 $ 0.200.25 $ 0.24
Loss from discontinued operations....................... (0.04) -- --
--------- -------- --------
Net income per share.................................. $ 0.31 $ 0.25 $ 0.24
========= ======== ========
Diluted:
Income from continuing operations....................... $ 0.26 $ 0.18 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------operations....................... (0.02) --
--------- -------- --------
Net income per shareshare.................................. $ 0.210.24 $ 0.18 $ 0.20
$ 0.20
============= ============= ==============
Fully Diluted:
Income from continuing operations $ 0.16 $ 0.20 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------
Net income per share $ 0.16 $ 0.20 $ 0.20
============= ============= ======================= ======== ========
Weighted average common shares.......................... 36,940 17,863 14,760
========= ======== ========
Weighted average common shares and dilutive potential
common share
equivalents, primary and fully diluted: 32,213shares......................................... 48,904 24,032 16,956
16,956
============== ============= ======================= ======== ========
See the accompanying notes to the consolidated and combined financial
statements.
F-4
3534
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED APPRECIATION
SHARES STOCK CAPITAL EARNINGS (DEPRECIATION)
---------- ------ ----- ------- ------------------ --------- --------------
December 31, 19931994..................... 14,760,000 $148 $ 14818,551 $ 14,7446,089 $ 3,589 $ (80)(1,208)
Net income - - - 3,500 -income.......................... -- -- -- 3,469 --
Pre-merger capital contribution from
parent - - 3,807 - -parent........................... -- -- 595 -- --
Pre-merger dividends paid to
parent - - - (1,000) -parent........................... -- -- -- (5,350) --
Change in unrealized appreciation (depreciation) - - - - (1,164)
Cumulative effectdepreciation,
net of change
in accounting for investments - - - - 36
-------------- ---------- ------------deferred taxes............ -- -- -- -- 4,474
----------- ---------------- --------- -------- -------
December 31, 1994 14,760,000 148 18,551 6,089 (1,208)
Net income - - - 3,469 -
Pre-merger capital contribution
from parent - - 595 - -
Pre-merger dividends paid
to parent - - - (5,350) -
Change in unrealized
appreciation (depreciation) - - - - 4,474
-------------- ---------- ------------ ----------- -----------
December 31, 19951995..................... 14,760,000 148 19,146 4,208 3,266
Net income - - -income.......................... -- -- -- 4,384 ---
Pre-merger capital contribution from
parent - -parent........................... -- -- 595 - --- --
Pre-merger dividends paid to
parent - - -parent........................... -- -- -- (1,750) ---
Change in unrealized appreciation,
(depreciation) - - - -net of deferred taxes............ -- -- -- -- 430
Reverse mergermerger...................... 10,858,158 108 16,136 - --- --
Stock issuancesissuances..................... 7,251,888 73 38,164 - ---
Stock optionsoptions....................... 101,960 1 1,153 - --- --
Business acquisitionsacquisitions............... 792,500 8 5,252 - -
-------------- ---------- -------------- --
----------- ---------------- --------- -------- -------
December 31, 19961996..................... 33,764,506 338 80,446 6,842 3,696
Net income.......................... -- -- -- 11,530 --
Change in unrealized appreciation,
net of deferred taxes............ -- -- -- -- (2,090)
Reverse merger
Stock issuances..................... 616,611 6 5,261 -- --
Stock options....................... 53,032 1 334 -- --
Warrants............................ 533,032 5 2,819 -- --
Business acquisitions............... 6,496,918 65 38,657 -- --
----------- ----- --------- -------- -------
December 31, 1997..................... 41,464,099 $415 $ 338127,517 $18,372 $ 80,446 $ 6,842 $ 3,696
============== ========== ============1,606
=========== ================ ========= ======== =======
See the accompanying notes to the consolidated and combined financial
statements.
F-5
36
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands, except share data)35
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 1996 AND 1995
1997 1996 1995
AND 1994
1996 1995 1994
--------- --------- ----------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operationsoperations............................ $ 12,765 $ 4,422 $ 3,469 $ 3,500
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of business.................................... (171) -- --
Net loss from operations of discontinued operationsbusiness........... (663) (38) - ---
Net loss on disposal of discontinued business............... (572) -- --
Deprecation and amortizationamortization................................ 12,282 7,969 8,143
5,866
Deferred income taxestaxes....................................... (958) (27) (699) 55
Income on participation transaction - - (807)
Cash provided by (used in) changes in assets and liabilities,
net of acquisition:acquisitions and dispositions:
Accounts receivable, net.................................. (13,437) -- --
Premiums receivable, netnet.................................. 3,117 (915) (62) (348)
Deferred policy acquisition costscosts......................... (9,803) (8,616) (7,476)
(6,748)
Reinsurance recoverables, netnet............................. (4,030) 1,462 (1,671)
(1,150)
Other assetsassets.............................................. (6,166) (1,540) (527)
(313)Accounts payable.......................................... 6,069 136 --
Losses and loss expenses payablepayable.......................... 6,947 4,097 2,341
5,133
Unearned premiumspremiums......................................... (1,582) 3,001 183
3,287
Income taxestaxes.............................................. 889 646 725
170
Accrued expensesexpenses.......................................... 16,505 1,105 533
(82)
Other liabilities 3,292liabilities......................................... (1,855) 3,156 1,242
1,273Non-cash charges and working capital changes from
discontinued operations................................. (15,620) -- --
Other, netnet................................................ 993 (1,693) (2,599)
(146)
-------- ------- --------------- --------
Net cash provided by operating activitiesactivities...................... 4,710 13,165 3,602
9,690
-------- ------- --------------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities, held to maturitymaturity................... (869) (1,318) (269) (1,805)
Purchase of fixed maturities, available for salesale................. (21,222) (12,408) (9,552) (8,857)
Purchase of equity securities, available for sale................ (2,816) (2,921) (228) (223)
Redemption of fixed maturities, held to maturitymaturity................. 1,172 1,000 1,281 2,009
Sale of fixed maturities, available for salesale..................... 6,006 9,333 7,089 1,155
Sale of equity securities, available for sale.................... 1,285 675 150 201
Increase in mortgage loansloans....................................... -- (1,275) (1,342) (1,893)
Principal receipts on mortgage loansloans............................. 1,846 983 910 780
Change in short-term investmentsinvestments................................. 584 (3,956) 27 5,968
Business acquisitions, net of cash acquiredacquired...................... (35,822) 912 - 538--
Proceeds from dispositions of businesses......................... 10,700 -- --
Acquisition of property and equipment, net....................... (2,284) (286) (223)
(340)
-------- ------- --------------- --------
Net cash used in investing activitiesactivities.......................... (41,420) (9,261) (2,157)
(2,467)
-------- ------- --------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Pre-merger dividends paid to parentparent.............................. -- (1,750) (5,350)
(1,000)Proceeds from debt............................................... 13,416 -- --
Repayment of debtdebt................................................ (6,233) (836) (295) (380)
Proceeds from stock issuancesissuances.................................... 5,267 38,237 - ---
Proceeds from exercise of stock options and warrants............. 3,159 -- --
-------- ------- --------------- --------
Net cash provided by (used in) financing activitiesactivities............ 15,609 35,651 (5,645)
(1,380)
-------- ------- --------------- --------
Net increase (decrease) in cash and cash equivalentsequivalents............... (21,101) 39,555 (4,200) 5,843
Cash and cash equivalents at beginning of yearyear..................... 42,249 2,694 6,894
1,051
-------- ------- --------------- --------
Cash and cash equivalents at the end of year:
Continuing operationoperation............................................. 21,148 39,874 2,694
6,894
Discontinued operationsoperations.......................................... -- 2,375 - ---
-------- ------- --------------- --------
Total cash and cash equivalents at end of yearyear..................... $ 21,148 $ 42,249 $ 2,694
$ 6,894
======== ======= =============== ========
See the accompanying notes to the consolidated and combined financial
statements.
F-6
37
INTERNATIONAL ALLIANCE36
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
International AllianceCentury Business Services, Inc. and subsidiaries (the "Company") is a
diversified services organization which, acting through its subsidiaries,
provides outsourced business services, including specialty insurance services,
to small and business consulting and management services. The Company
markets its specialty insurance and bonding products and business
services inmedium sized commercial enterprises throughout the United States.
RESI Transaction
----------------
On October 18, 1996, Republic Environmental Services, Inc. ("RESI") issued
(a) an aggregate of 14,760,000 shares of RESI common stock, par value $0.01 per
share ("RESI Common Stock"), (b) warrants to purchase an aggregate of 4,200,000
additional shares of RESI Common Stock at exercise prices ranging from $2.625 to
$3.875 per share, expiring in two to four years and (c) a promissory note in
principal amount of $4,000,000 in exchange for the stock of Century Surety
Company ("CSC") and Commercial Surety Agency, Inc. d.b.a. Commercial Surety
Underwriters ("CSU") (together the "Alliance Companies") ("the RESI
Transaction"). The RESI transaction was accounted for as a reverse merger
whereby the Alliance Companies gained a controlling interest in the stock of
RESI. Contemporaneously, RESI changed its name to International Alliance
Services, Inc. On June 24, 1996, the Company began trading under the symbol
"IASI" in anticipation of the merger with Alliance Companies, which ultimately
resulted in a change of its name change.to Century Business Services, Inc.
The consolidated and combined financial statements presented herein are as
follows:
i. Consolidated and Combined Balance Sheets of the Company at
December 31, 19961997 and the Alliance Companies at December 31,
1995;1996;
ii. Consolidated Statement of Income for the year ended December
31, 1996 of the Alliance Companies and RESI for the period
October 1, 1996 to December 31, 1996. The Combined Statements of Income of the Company for
the years ended December 31, 19951997, 1996 and 1994 are
of the Alliance Companies;1995:
iii. Consolidated and Combined Statements of Shareholders' Equity of
the Company for the years ended December 31, 1997, 1996 1995
and 1994 reflecting the number of shares received in the RESI
Transaction as if the shares had been issued at January 1,
1994;1995;
iv. Consolidated and Combined Statements of Cash Flows of the Company
for the year ended December 31, 1996, and the
Alliance Companies for the years ended December 31, 19951997, 1996 and 1994.1995.
The following are significant accounting policies followed by the Company.
Basis of Consolidation
----------------------
The Company's consolidated and combined financial statements include the
accounts of all wholly owned subsidiaries. Significant subsidiaries of
the Company include CSC in continuing operations and RESI in
discontinued operations. All significant intercompany accounts
and transactions have been eliminated.
F-7
38
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)eliminated in consolidation.
Accounting Estimates
--------------------
In preparing the consolidated and combined 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 and combined financial statements
and the reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of losses and loss expenses payable, the recoverability of
deferred policy acquisition costs, and the net realizable value of reinsurance
recoverables and net assets held for disposal.
Management believes that the recorded liability for losses and loss
expenses is adequate. While management uses available information to estimate
losses and loss expenses payable, future changes to the liability may be
necessary based on claims experience and changing claims frequency and severity
of conditions. Management
F-7
37
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
also believes that deferred policy acquisition costs are recoverable, however,
future costs that are associated with the business in the unearned premium
liability could exceed management's estimates, causing the recorded asset to be
unrecoverable in whole or in part. In addition, management's estimates of
amounts recoverable from reinsurers, net of valuation allowance, are believed to
be consistent with the claim liability, but the actual amounts recoverable could
differ from those estimates. The amounts the Company will ultimately realize
from the sale of the net assets held for disposal could differ from management's
estimates of their realizable value.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consists of funds held on deposit and short-term
highly liquid investments with an originala maturity of three months or less at the date of
purchase. At various times during the year, the Company had deposits with
financial institutions in excess of the $100,000 federally insured limit.
Excess of Cost over Net Assets of Businesses Acquired
-----------------------------------------------------
The excess of cost over the fair value of net assets of businesses acquired
is being amortized on a straight-line basis over the expected periods ranging from twenty to twenty-threebe
benefited, which is generally 30 years. It is the Company's policy to evaluate
the excess of cost over the net assets of businesses acquired based on an
evaluation of such factors as the occurrence of a significant adverse event or
change in the environment in which the business operates or if the expected
future net cash flows, undiscounted and without interest, would become less than
the carrying amount of the asset. An impairment loss would be recorded in the
period such determination is made based on the fair value of the related
businesses. Amortization expense from continuing operations in 1996 was approximately
$1,334,000, $33,000 and $0 in 19951997, 1996 and 1994,1995, respectively.
Property and Equipment
----------------------
Property and equipment, which is included in other assets in the
consolidated and combined balance sheets, are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided on the
straight-line basis over estimated useful lives.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The
Company uses an
accelerated methodadopted this standard, as required, for its December 31, 1997 financial
statements. For the years presented, the company presents both basic and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of depreciation, which approximatescommon shares
outstanding for the straight
line depreciation method, overperiod. Diluted earnings per share reflects the estimated useful livespotential
dilution that could occur if common stock equivalents were exercised and then
shared in the earnings of the assets, which are 5 years.Company.
F-8
39
INTERNATIONAL ALLIANCE38
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company uses the asset and liability method of accounting for income
taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial accounting and tax bases
of assets and liabilities using the applicable tax laws in-- (CONTINUED)
Investments
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred income tax provisions and
benefits are based on the changes in the deferred tax asset or tax
liability from period to period.
Earnings per Common and Common Share Equivalents
------------------------------------------------
The earnings per common share calculation for the years ended December 31,
1996, 1995 and 1994 was based upon the weighted average number of
common and common share equivalents outstanding and the incremental
number of outstanding common share equivalents computed under the
modified treasury stock method. Because the aggregate number of common
shares obtainable upon exercise of the outstanding options and warrants
exceeded 20% of the number of common shares outstanding, all options
and warrants were assumed to have been exercised and the aggregate
proceeds were applied first, to repurchase outstanding common shares at
the average market price for primary earnings per share and at the
ending market price for fully diluted earnings per share during the
period, but not to exceed 20% of the outstanding shares; second, to
reduce borrowings; and third, to invest the remaining funds in U.S.
government securities or commercial paper. Appropriate recognition
relating to the effect of all interest savings and benefits and the
respective tax effect was applied.
Investments
-----------
The Company adopted the provisions of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, as of January 1, 1994. Fixedall fixed maturity securities that the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and are stated at amortized cost; all other fixed maturity securities
and all equity securities are classified as available for sale and are stated at
fair value, with the unrealized gains and losses, net of deferred income tax,
reported as a separate component of shareholders' equity. The Company has no
investment securities classified as trading. Pursuant to a Financial Accounting Standards Board Special Report, A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, the Company reassessed the
classification of all its investment securities. Effective December 20,
1995, the Company reclassified certain of its held to maturity
securities to available for sale (see Note 4). Realized gains and losses on the
sale of investments are determined on the basis of specific security
identification and also includes other than temporary declines, if any. Interest
income is recognized on the accrual basis and dividend income is recognized on
the ex-dividend date.
Deferred Policy Acquisition Costs
---------------------------------
Acquisition costs, consisting of commissions, premium taxes and certain
underwriting expenses that vary with and are primarily related to the production
of business, are deferred and amortized ratably over the policy term. The method
used limits the amount to its estimated realizable value which gives effect to
the premium to be earned, the incurrence of loss and loss expenses and certain
other costs expected to be incurred as premium is earned.
F-9
40
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options
-------------
ThePrior to January 1, 1996, the Company accountsaccounted for its stock option plans
underin accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees. TheEmployees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company has adopted the disclosure only provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation.Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Losses and Loss Expenses Payable
--------------------------------
The liability for losses and loss expenses is provided based upon case basis estimates for
losses reported in respect to direct business; estimates of unreported losses
based on estimated loss experience; estimates received and supplemental amounts
provided relating to assumed reinsurance; and deduction for estimated salvage
and subrogation recoverable. The liability for loss expenses is established by
estimating future expenses to be incurred in settlement of the claims provided
for in the liability for losses. The liability for losses and loss expenses is
not discounted.
Premium Recognition
-------------------
Premiums are recognized as revenue in proportion to the insurance coverage
provided, which is generally ratable over the terms of the policies. Unearned
premiums are generally computed on the daily pro rata basis and include amounts
relating to assumed reinsurance.
Reinsurance Ceded
-----------------
In accordance with SFAS No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts, reinsurance receivables are
accounted for and reported separately as assets, net of valuation allowance.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability.
F-9
39
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Contracts not resulting in the reasonable possibility that the reinsurers may
realize a significant loss from the insurance risk assumed generally do not meet
the conditions for reinsurance accounting and are accounted for as deposits.
Reinsurance premiums ceded and reinsurance recoveries on claims incurred are
deducted from the respective revenue and expense accounts. The Company is not
relieved of its primary obligation in a reinsurance transaction.
Business Risk
-------------
The following is a description of the most significant risks facing
property and casualty insurers and how the Company mitigates those risks:
Inadequate Pricing Risk areis the risksrisk that the premium charged for insurance
and insurance related products are insufficient to cover the costs associated
with the distribution of such products which include: claim and loss costs, loss
adjustment expenses, acquisition expenses, and other corporate expenses. The
Company utilizes a variety of actuarial and other qualitative methods to set
such levels.
F-10
41
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Business Risk (Continued)
-------------------------levels
Adverse Loss Development and Incurred But Not Reported ("IBNR") Risk is the
risk inherent in the handling and settling of claims whose ultimate costs, which
include loss costs, loss adjustment expenses, and other related expenses, are
unknown at the time the claim is presented. An associated risk relates to claims
which have been incurred, but for which the Company has no knowledge. The
Company makes judgments as to the ultimate costs of presented claims and makes a
provision for their future payment by establishing reserves for existing claims
(case reserves) and for IBNR claims, however, there can be no assurance that the
amounts reserved will be adequate to ultimately make all required payments.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will occur and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits or new legal
theories may create costs for the insurer beyond those recorded in the financial
statements. The Company is exposed to this risk by writing approximately 26% of
its business in Ohio and surrounding states and 41% in California, thus
increasing its exposure in these particular regions. This risk is reduced by
underwriting and loss adjusting practices that identify and minimize the adverse
impact of this risk.
Credit Risk is the risk that issuers of securities and mortgagors of the
mortgages owned by the Company will default, or other parties, including
reinsurers that owe the Company money, will not pay. The Company minimizes this
risk by adhering to a conservative investment strategy, by maintaining sound
reinsurance and credit and collection policies, and by providing for any amounts
deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates this
risk by attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities. To the extent that liabilities come due
more quickly than assets mature, an insurer would have to sell assets prior to
maturity and recognize a gain or loss. Management believes that the Company's
positive cash flow from investment income and operations will enable the Company
to operate without having to recognize significant losses from the sale of
investments that have an unrealized holding loss as of December 31, 1996.1997.
Reclassifications
-----------------
Certain reclassifications have been made to the 19951996 and 19941995 financial
statements to conform to the 19961997 presentation.
2. ACQUISITIONS
In 1996, the Company made the following acquisitions:
On November 6, 1996, the Company acquired all of the outstanding shares of
Environmental and Commercial Insurance Agency, Inc. ("ECI"), an
insurance agency based in Columbus, Ohio for $1,000,000 in cash and
192,500 shares of the Company's Common Stock. The shares issued are
subject to a six month lock-up restriction.
F-11F-10
42
INTERNATIONAL ALLIANCE40
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
(Continued)
On December 3, 1996,During fiscal 1997, the Company completedcontinued its strategic acquisition
program, purchasing the acquisitionbusinesses of SMR & Co.39 complementary companies. These
acquisitions comprised the following: ten accounting systems and tax advisory
businesses, including Comprehensive Business Services, Inc. ("SMR"Comprehensive"), a
business servicesfranchisor of accounting services; eight specialty insurance businesses; four
workers' compensation administration businesses; ten payroll administration/
benefits design and consulting firm in Mayfield Village,
Ohio. Underadministration firms; three human resources/executive search
firms; one valuation and appraisal group; two technology firms; and one
broker/dealer.
These acquisitions, with the termsexception of Business Management Services,
Inc. and BMS Employee Benefits, Inc., (collectively, "BMS") were accounted for
as a purchase, and accordingly, the operating results of the acquisition, the Company acquired all of
the outstanding shares of SMR for 600,000 shares of the Company's
Common Stock and three-year warrants to acquire an additional 900,000
shares at $10.375 per share. Of the 600,000 shares issued, 90,000
shares are subject to a six-month lock-up restriction and 510,000
shares are subject to a two-year lock-up restriction.
These acquisitionscompanies
have been included in the accompanying consolidated and combined financial
statements since the dates of acquisition. The BMS acquisition was accounted for
byusing the purchase"pooling of interests" method of accounting. The differenceCompany's prior
period financial statements have not been restated for the BMS acquisition as
the transaction was considered immaterial.
The aggregate purchase price of $6,081,000 between the fair value of net
assets acquiredaforementioned acquisitions was
approximately $87.748 million, and the purchaseincludes future contingent consideration of
$1,000,000up to $5.880 million in cash and $5,260,0001,716,226 shares of restricted common stock,
with an estimated stock value at date of acquisition of $17.848 million, based
on the Company'sacquired companies' ability to meet certain performance goals. The
aggregate purchase price, comprised of cash payments, issuance of promissory
notes, and issuance of Common Stock, has been allocated to goodwill. Thethe net assets liabilities and operating results of these
companies are reflected in the
Company's financial statements fromCompany based upon their respective datesfair market values. The excess of acquisition forward.the
purchase price over net assets acquired (goodwill) approximated $89.856 million
and is being amortized over periods not exceeding 30 years. As a result of the
nature of the assets and liabilities of the businesses acquired, there arewere no
material identifiable intangible assets or liabilities.
The Company considers the following acquisitions as significant, and as
such, are discussed separately below:
In January 1997, Century acquired certain of the assets and business
of Midwest Indemnity Corporation ("Midwest"), in exchange for $3.3 million
in cash, 407,246 shares of restricted Common Stock and $1.8 million in
non-interest bearing notes payable in installments through December 31,
1998. Midwest markets surety bond products throughout the United States
through a system of approximately 100 independent agents and subagents. In
conjunction with the acquisition of Midwest's assets, the Century Surety
Group, which has developed the Company's surety bond business on a regional
basis over the past nine years, entered into a strategic partnership with
Gulf Insurance Company of New York (a Travelers/Aetna company). Under the
terms of the partnership, Century Surety Underwriters has been designated
Underwriting Services Administrator of Gulf's contract surety business.
In June 1997, Century acquired ZA Business Services, Inc. for
approximately $6.2 million in cash and 358,000 shares of restricted Common
Stock. ZA Business Services, Inc., located in Philadelphia, provides a wide
range of outsourced business services to a broad spectrum of industries as
well as litigation support to the legal profession. It has satellite
offices in Boston, Massachusetts; Milwaukee, Wisconsin and Harrisburg,
Pennsylvania and serves a client base in excess of 1,500 businesses and
individuals.
In September 1997, Century acquired Valuation Counselors Group, Inc.
for $6.75 million in cash and 558,026 shares of restricted Common Stock.
This valuation and appraisal service business has locations in Illinois,
California, Georgia, Massachusetts, Michigan, Missouri, New Jersey, New
York, Texas, Virginia, Washington and Wisconsin.
In October 1997, Century acquired Comprehensive, for 48,524 shares of
Common Stock, $1.75 million in cash and 154,242 shares of restricted Common
Stock. Comprehensive offers an extensive distribution network for the full
range of Century business services.
F-11
41
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1997, Century acquired Robert D. O'Byrne & Associates,
Inc. and its affiliate, The Grant Nelson Group, Inc. for $5.5 million in
cash, 654,300 shares of restricted Common Stock at closing. Robert D.
O'Byrne & Associates, Inc. and The Grant Nelson Group provide benefits
administration services.
The following data summarizes, on an unaudited pro forma basis, the
combined results of continuing operations of the Company and the businesses
acquired for the two years ended December 31,1996.31, 1997. The pro forma amounts give
effect to appropriate adjustments resulting from the combination, but are not
necessarily indicative of future results of operations or of what results would
have been for the combined companies (in thousands):
UNAUDITED
----------------------
1997 1996
1995
------------- ---------------------- --------
Net revenues --- pro forma $ 44,900 $ 39,848
============= ==============forma............................. $188,793 $159,689
======== ========
Net income --- pro formaforma............................... $ 5,08414,347 $ 3,979
============= ==============10,084
======== ========
Earnings per common and common
share equivalent --- pro forma
- primary-- basic....................................... $ .240.35 $ .23
============= ==============
- fully diluted0.30
======== ========
-- diluted..................................... $ .180.27 $ .23
============= ==============0.25
======== ========
3. CALCULATION OF EARNINGS PER COMMON AND COMMON SHARE
EQUIVALENTS
Income from continuing operationsIn February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. The Company adopted this standard, as required, for the year endedits
December 31, 1996 was
adjusted to reflect1997 financial statements. For the years presented, the Company
presents both basic and diluted earnings per share. The following data shows the
amounts used in computing earnings per share and the effect on the weighted
average number of all interest savings and benefits and
the tax effects under the modified treasury stock method. Modifications
to income were not required for the years ended December 31, 1995 and
1994.shares of dilutive potential common stock.
Fully
Primary DilutedFOR THE YEAR ENDED 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------------
(in thousands)---------
BASIC EARNINGS PER SHARE
Income from continuing operations............... $12,765 36,940 $ 0.35
------
Warrants........................................ - 11,721
Options......................................... - 243
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations plus assumed
conversions................................... $12,765 48,904 $ 0.26
======= =======
------
FOR THE YEAR ENDED 1996
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE
Income from continuing operations............... $ 4,422 17,863 $ 4,422
Interest expense reduction less 34% tax rate 30 30
Interest income less 34% tax rate 2,165 626
------------- --------------
Adjusted income0.25
------
Warrants........................................ -- 6,001
Options......................................... -- 168
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations 6,617 5,078
------------- --------------
Loss from discontinued operations (38) (38)
------------- --------------
Adjusted net incomeplus assumed
conversions................................... $ 6,5794,422 24,032 $ 5,040
============= ==============0.18
======= =======
------
F-12
43
INTERNATIONAL ALLIANCE42
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 3. CALCULATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
(Continued)
For the three years ended December 31, 1996, the Company computed-- (CONTINUED)
FOR THE YEAR ENDED 1995
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE
Income from continuing operations............... $ 3,469 14,760 $ 0.24
-------
Warrants........................................ -- 2,196
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations plus assumed
conversions................................... $ 3,469 16,956 $ 0.20
======= ======= -------
Basic earnings per common andshare were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earning per common share equivalents underfor the modified treasury
stock method as follows (in thousands):
Fully
Primary Diluted
------------- --------------
Weighted common shares - 1996:
Weighted average common shares 17,863 17,863
Additional stock equivalents less 20% limitation
on assumed repurchase 14,350 14,350
------------- --------------
32,213 32,213
============= ==============
Weighted common shares - 1995 and 1994:
Weighted average common shares 14,760 14,760
Additional share equivalents less 20% limitation
on assumed repurchase 2,196 2,196
------------- --------------
16,956 16,956
============= ==============
During Februaryyears 1997 and 1996 were determined on
the Financial Accounting Standards Board issued
SFAS No. 128, Earnings per Share, which is effective for financial
statements for annual periods ending after December 15, 1997. However,
disclosureassumption that the options and warrants were exercised at the beginning of
pro formathe period, or at time of issuance, if later. As a result, the Company's
reported earnings per share amounts computed usingfor 1996 and 1995 were restated. The effect of this
accounting change on previously reported earnings per share (EPS) data was as
follows:
As a result of the provisionsadoption of SFAS No. 128 is permissible. The unaudited pro formain 1997, the Company's reported
earnings per share for 1996 and 1995 were restated. The effect of the Company basedthis
accounting change on SFAS No. 128 arepreviously reported earnings per share (EPS) was as
follows:
1996 1995
1994
------------- ------------- ------------------- ------
Per share amount
Primary EPS as reported................................... $ 0.21 $ 0.20
Effect of SFAS No. 128.................................... 0.04 0.04
------ ------
Basic EPS:
Continuing operationsEPS as restated..................................... $ .250.25 $ .240.24
====== ======
Fully diluted EPS as reported............................. $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share0.16 $ .25 $ .24 $ .24
============ ============= =============0.20
Effect of SFAS No. 128.................................... 0.02 --
------ ------
Diluted EPS from:
Continuing operationsas restated................................... $ .180.18 $ .24 $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share $ .18 $ .24 $ .24
============ ============= =============0.20
====== ======
F-13
44
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 19961997 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agenciesagencies........... $ 6,1366,971 $ 2847 $ (65)17 $ 6,0997,001
Corporate securities 8,850 18 (96) 8,772securities................... 6,810 14 34 6,790
Foreign corporate bonds................ 317 16 -- 333
Mortgage-backed securities 495 10 - 505
--------------- ------------- ------------- ----------------
Totalssecurities............. 430 8 -- 438
------- ---- ---- -------
Totals.............................. $14,528 $ 15,48185 $ 5651 $ (161) $ 15,376
=============== ============= ============= ================
The amortized cost and estimated fair value of securities available for
sale at December 31, 199614,562
======= ==== ==== =======
F-13
43
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of securities available for
sale at December 31, 1997 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agenciesagencies........... $ 16,0677,681 $ 224179 $ (93)17 $ 16,1987,843
Corporate securities 10,962 87 (66) 10,983securities................... 16,817 226 7 17,036
Foreign corporate bonds................ 1,009 -- 32 977
Mortgage-backed securities 8,092 207 (9) 8,290
--------------- ------------- ------------- ----------------
35,121 518 (168) 35,471securities............. 13,402 338 5 13,735
Other-assets backed securities......... 11,842 120 8 11,954
------- ------ ---- -------
50,751 863 69 51,545
Equity securities 4,349 5,022 (158) 9,213
--------------- ------------- ------------- ----------------
Totalssecurities........................ 6,163 1,580 150 7,593
------- ------ ---- -------
Totals................................. $56,914 $2,443 $219 $ 39,470 $ 5,540 $ (326) $ 44,684
=============== ============= ============= ================59,138
======= ====== ==== =======
Expected maturities will differ from contractual maturities because the
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized cost and estimated fair value of fixed
maturities held to maturity at December 31, 1996,1997, by contractual maturity, were
as follows (in thousands):
Amortized Estimated
Cost Fair Value
--------------- ----------------AMORTIZED ESTIMATED
COST FAIR VALUE
------- ----------
Due in one year or lessless.................................. $ 1,6334,306 $ 1,6264,291
Due after one year through five years 12,921 12,811years.................... 9,361 9,384
Due after five years through ten yearsyears................... 355 356 347
Due after ten yearsyears...................................... 76 87
--------------- ----------------
14,986 14,87193
------- -------
14,098 14,124
Mortgage-backed securities 495 505
--------------- ----------------securities............................... 430 438
------- -------
$14,528 $ 15,481 $ 15,376
=============== ================14,562
======= =======
F-14
45
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 1996,1997, by contractual maturity, were as follows (in
thousands):
Amortized Estimated
Cost Fair Value
--------------- ----------------AMORTIZED ESTIMATED
COST FAIR VALUE
------- ----------
Due in one year or lessless.................................. $ 1,1822,557 $ 1,1822,552
Due after one year through five years 21,904 21,969years.................... 15,971 16,180
Due after five years through ten years 3,701 3,795years................... 6,237 6,353
Due after ten years 242 235
--------------- ----------------
27,029 27,181years...................................... 742 771
------- -------
25,507 25,856
Mortgage-backed securities 8,092 8,290
--------------- ----------------securities............................... 13,402 13,735
Other asset-backed securities............................ 11,842 11,954
------- -------
$50,751 $ 35,121 $ 35,471
=============== ================51,545
======= =======
F-14
44
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 19951996 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. Treasury securities and obligations
of U.S. government corporations and
agenciesagencies............................... $ 6,1596,136 $ 8128 $ (9)65 $ 6,2316,099
Corporate securities 8,654 27 (62) 8,619securities..................... 8,850 18 96 8,772
Mortgage-backed securities 496 18 - 514
--------------- ------------- ------------- ---------------
Totalssecurities............... 495 10 -- 505
------- ---- ---- -------
Totals................................. $15,481 $ 15,30956 $161 $ 126 $ (71) $ 15,364
=============== ============= ============= ===============15,376
======= ==== ==== =======
The amortized cost and estimated fair value of securities available for
sale at December 31, 19951996 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agenciesagencies........... $16,067 $ 6,522224 $ 30393 $ (7)16,198
Corporate securities................... 10,962 87 66 10,983
Mortgage-backed securities............. 8,092 207 9 8,290
------- ------ ---- -------
35,121 518 168 35,471
Equity securities........................ 4,349 5,022 158 9,213
------- ------ ---- -------
Totals................................. $39,470 $5,540 $326 $ 6,818
Obligations of states and political
subdivisions 8,339 167 (3) 8,503
Corporate securities 14,990 439 (15) 15,414
Mortgage-backed securities 2,244 174 - 2,418
--------------- ------------- ------------ ----------------
32,095 1,083 (25) 33,153
Equity securities 1,999 3,589 (162) 5,426
--------------- ------------- ------------ ----------------
$ 34,094 $ 4,672 $ (187) $ 38,579
=============== ============= ============ ================44,684
======= ====== ==== =======
On December 20, 1995, the Company reclassified a portion of their held to
maturity securities to available for sale. The amortized cost and
estimated fair value of the securities reclassified were $5,733,000 and
$5,897,000, respectively, as of the date of reclassification.
F-15
46
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
Net investment income was comprised of the following for the years ended
December 31 as follows (in thousands):
1997 1996 1995 1994
------- ------- -------
InterestInterest........................................ $ 4,519 $ 3,652 $ 3,455
$ 2,588
DividendsDividends....................................... 341 142 96 96
------- ------- -------
Total investment incomeincome....................... 4,860 3,794 3,551
2,684
Less: Investment expenseinvestment expense........................ (336) (230) (210) (207)
------- ------- -------
Net investment incomeincome......................... $ 4,524 $ 3,564 $ 3,341
$ 2,477
======= ======= =======
F-15
45
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Realized gains and losses on investments for the years ended December 31
are as follows (in thousands):
1997 1996 1995 1994
------- ------- -------
Realized gains:
Available for sale:
Fixed maturitiesmaturities........................... $ 26 $ 117 $ 114
$ -
Equity securitiessecurities.......................... 3,066 1,381 9
146
OtherOther......................................... -- 125 73 -
------- ------- -------
Total realized gainsgains....................... 3,092 1,623 196 146
------- ------- -------
Realized losses:
Available for sale:
Fixed maturitiesmaturities........................... 10 32 27
42
Equity securitiessecurities.......................... 38 35 3
24
OtherOther......................................... -- 27 - ---
------- ------- -------
Total realized losseslosses...................... 48 94 30 66
------- ------- -------
Net realized gains on investmentsinvestments............. $ 3,044 $ 1,529 $ 166
$ 80
======= ======= =======
The change in net unrealized appreciation (depreciation) of investments is
summarized as follows (in thousands):
1997 1996 1995 1994
------- ------- -------
Available for sale:
Fixed maturitiesmaturities.............................. $ (709)444 $ (708) $ 2,147
$(1,088)
Equity securitiessecurities............................. (3,434) 1,437 3,583 (76)
------- ------- -------
$(2,990) $ 728729 $ 5,730
$(1,164)
======= ======= =======
The components of unrealized appreciation (depreciation) on securities available for sale
at December 31 were as follows (in thousands):
1997 1996 1995 1994
------- ------- -------
Gross unrealized appreciation (depreciation)appreciation................... $ 2,224 $ 5,214 $ 4,485
$(1,208)
Deferred income taxtax............................. (618) (1,518) (1,219) -
------- ------- -------
Net unrealized appreciation (depreciation)appreciation................... $ 1,606 $ 3,696 $ 3,266
$(1,208)
======= ======= =======
F-16
47
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
Fixed maturities held to maturity and certificates of deposit with a
carrying value of approximately $8,939,000$9,869,000 and $8,909,000$8,939,000 at December 31, 19961997
and December 31, 1995,1996, respectively, were on deposit with regulatory authorities
as required by law. At December 31, 19961997 and 19951996 all mortgage loans were
secured by properties in the states of California, Michigan and Ohio.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments and premiums
receivable: The carrying amounts reported in the consolidated and combined
balance sheets for these instruments are at cost, which approximates fair
value.
Investment securities: Fair values for investments in fixed maturities
are based on quoted market prices, where available. For fixed maturities
not actively traded, fair values are estimated using values obtained from
independent pricing services. The fair values for equity securities are
based on quoted market prices. Fair
F-16
46
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
values for fixed maturities available for sale and equity securities are
recognized in the consolidated and combined balance sheets.
Mortgage loans: The carrying amounts reported in the consolidated and
combined balance sheets are the aggregate unpaid balance of the loans,
which approximates fair value.
5. COMMON STOCK
The Company's authorized common stock consists of 100,000,000 (20,000,000
at December 31, 1995) shares of
common stock, par value $0.01 per share. The holders of the Company's Common
Stock are entitled to one vote for each share held on all matters votedsubmitted to a
vote of stockholders. There are no cumulative voting rights with respect to the
election of directors. Accordingly, the holder or holders of a majority of the
outstanding shares of Common Stock will be able to elect the entire Board of
Directors of the Company. Holders of Common Stock have no preemptive rights and
are entitled to such dividends as may be declared by the Board of Directors of
the Company 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 the Company, the holders of Common
Stock are entitled to share ratably in the net assets of the Company 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 Star Bank, N.A.
In June 1997, the Company completed the registration of 5,372,805 shares of
common stock (the "Shares") of which up to 1,217,277 are issuable upon exercise
of outstanding warrants. The Shares were registered under the Securities Act of
1933 on by shareholders. Onbehalf of certain selling shareholders in order to permit the public or
private sale or other public or private distribution of the Shares. Accordingly,
the Company will not receive any proceeds for these Shares.
In April 1997, the Company completed a private placement in which the
Company sold an aggregate of 616,611 units (the "Units") to qualified investors
at an aggregate purchase price of $9.00 per Unit. Each Unit consisted of one
share of common stock and one warrant to purchase one share of common stock at
an exercise price of $11.00 per share, exercisable for a three year period from
the date of issuance. The Company realized net proceeds of approximately
$5,300,000.
In January 22, 1997, the Company completed the registration of 32,126,076
shares of common stock (the "Shares") of which up to 17,925,888 are issuable
upon exercise of outstanding warrants. The Shares were registered under the
Securities Act of 1933 on behalf of certain selling shareholders in order to
permit the public or private sale or other public or private distribution of the
Shares. Accordingly, the Company will not receive any proceeds for these Shares.
On October 18, 1996, the Company issued 4,000,000 shares of the Company's
Common Stock and warrants to purchase an additional 12,000,000 shares
of the Company's Common Stock at exercise prices ranging from $2.625 to
$3.875 per share, expiring in two to four years, for an aggregate
purchase price of $10,500,000.
In December 1996, the Company completed a private placement in which the
Company offered 3,251,888 units (the "Units") to qualified investors at an
aggregate purchase price of $9.00 per Unit. Each Unit consisted of one share of
common stock and one warrant to purchase one share of common stock at an
exercise price of $11.00 per share, exercisable for a three year period from the
date of issuance. The Company realized net proceeds of $ 27,737,000.$27,737,000.
In October 1996, the Company issued 4,000,000 shares of the Company's
Common Stock and warrants to purchase an additional 12,000,000 shares of the
Company's Common Stock at exercise prices ranging from $2.625 to $3.875 per
share, expiring in two to four years, for an aggregate purchase price of
$10,500,000.
The Company granted warrants in connection with certain acquisitions made
during the year. Portions of these warrants are restricted from being
transferred in accordance with various Lock-Up agreements between the former
shareholders of the acquired entities and the Company. The last restriction on
transferring these locked-up warrants expires in April 2000.
F-17
48
INTERNATIONAL ALLIANCE47
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 5. COMMON STOCK (Continued)-- (CONTINUED)
RESI agreed to issue to holders of unexpired warrants of its former parent,
additional RESI warrants to acquire shares of RESI's Common Stock equal to one
fifth of the number of shares available. At the Distribution date, RESI adjusted
the per share exercise price of the RESI warrants to reflect the effect of the
distribution on the market prices of RESI and its former parent's common stock.
These warrants are designated as stapled warrants and expire at various dates
through December 2000. In connection with the RESI Transaction, the holders of
these warrants are able to exercise under the original terms of the warrants and
will receive Company stock.
At December 31, 1997 there were outstanding unexercised warrants to acquire
22,379,387 shares of the Company's common stock of which 20,573,053 were
exercisable at prices ranging from $1.075 to $13.06. The remaining 1,806,334
warrants are restricted from transfer in accordance with various Lock-Up
agreements discussed above. At December 31, 1996 there were outstanding
unexercised warrants to acquire 20,785,888 shares of the Company's common stock
at prices ranging from $1.075 to $11.00.
Under the Agents 1997 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 the Company'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 July 2002, or earlier under
certain conditions, including termination of the agency agreement.
Under the 1996 Employee Stock Option Plans, a maximum of 1,000,000 options
may be awarded. The options awarded are subject to a 20% incremental vesting
schedule over a five-year period commencing from the date of grant. The options
are awarded at a price not less than fair market value at the time of the award
and expire six years from the date of grant. Further, under the 1996 plan
shareholders granted 250,000 options to non-employee directors. These options
became exercisable immediately upon being granted with a five year expiration
term from the date of grant.
As a result of the sale of RESI in July 1997, options awarded under the
1995 Employee Stock Option Plan became immediately vested and exercisable. These
options, which expire in July 1998, remain vested as long as the optionee is
employed by the former parent, RESI or their affiliates. The option price is
based on the fair market value of the common shares on the grant date.
Prior to the RESI Transaction, certain options were granted to employees,
directors and affiliates of RESI's former parent company. When RESI was spun-off
in April 1995 (the "Distribution Date"), optionees received options to acquire
RESI Common Stock at the ratio of one RESI option for each five options under
the former parent's 1990 and 1991 Stock Option plans. The outstanding options at
the Distribution Date and the RESI options granted with respect thereto are
stapled and are only exercisable if exercised together. UnvestedAs a result of the sale
of RESI in July 1997, options heldunder these plans became immediately vested and
unvested
RESIexercisable. These options, granted, vestwhich expire in accordance with the original vesting
scheduleJuly 1998, remain vested as long as
the optionee is employed by the former parent, RESI or their affiliates. Options granted under these plans expire ten years
from the date of grant, and vest over varying periods. The
option price is based on the fair market value of the common shares on the date
of grant.
RESI agreed to issue to holders of unexpired warrants of its former
parent, additional RESI warrants to acquire shares of RESI's Common
Stock equal to one fifth of the number of shares available. At the
Distribution Date, RESI adjusted the per share exercise price of the
RESI warrants to reflect the effect of the distribution on the market
prices of RESI and its former parent's common stock. These warrants are
designated as stapled warrants and expire at various dates through May
2003. In connection with the RESI Transaction, the holders of these
warrants are able to exercise under the original terms of the warrants
and will receive Company stock. At December 31, 1996 and 1995, there
were outstanding unexercised warrants to acquire 434,000 and 622,000
shares of the Company's Common Stock, respectively. During 1996,
188,000 RESI warrants were exercised at $3.60 with no cancellations. In
1995, 250,000 RESI warrants were exercised ranging in price from $1.08
to $5.10 with no cancellations.
Under the Company's 1995 Employee Stock Option Plan, a maximum of 500,000
options may be awarded. Such options are granted at no less than fair
market value at the date of grant, become exercisable in increments of
20% over a five-year vesting period and expire ten years from the date
of grant. In the event of a change of control, as defined in the plan,
all outstanding employee options shall become immediately exercisable
and the prescribed time limits for exercise will run from such vesting.
Information relating to the above stock option plans is summarized below:
1997 1996
1995
------------- --------------------- --------
Outstanding at beginning of yearyear......................... 317,072 190,200
-
Granted at Distribution Date - 420,400
Granted (a).............................................. 1,870,500 230,000
31,000
Exercised (b)............................................ (53,032) (101,960) (257,800)
Expired or canceledcanceled...................................... (74,000) (1,168)
(3,400)
------------- --------------------- ---------
Outstanding at end of year (c)...................... 2,060,540 317,072
190,200
------------- --------------------- ---------
Exercisable at end of year (d)...................... 567,640 22,320
70,000
============= ===================== =========
Available for future grant at the end of year (e)year............ 342,500 273,000
502,000
============= ============
(a) Options were granted at average costs of $2.31 and $1.50 in 1996 and
1995, respectively.
(b) Options were exercised at prices ranging from $1.08 to $3.60 and
averaging $3.43 in 1996 and $1.08 to $5.80 and averaging $5.07 in
1995.
(c) Prices for options outstanding at December 31, 1996 ranged from $1.08
to $4.10 and averaged $2.11 with expiration dates ranging from May
1997 to May 2006. Prices for options outstanding at December 31, 1995,
ranged from $1.08 to $5.80 and averaged $2.25 with expiration dates
ranging from May 1996 to May 2004.
(d) Options exercisable at December 31, 1996 and 1995 averaged $2.18 and
$3.15, respectively
(e) Includes stapled options and options relating to the Company's 1995
Employee Stock Option Plan.========= =========
F-18
49
INTERNATIONAL ALLIANCE48
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 5. COMMON STOCK (Continued)
The Company is currently seeking shareholder approval with regards to the
1996 Employee Stock Option Plan. Under the 1996 Employee Stock Option
Plan, the Company will reserve 1,000,000 shares of Company Common
Stock. The options awarded will be subject to a 20% incremental vesting
schedule over a five-year period commencing from the date of grant. The
options will be awarded at a price not less than fair market value at
the time of the award and will expire six years from the date of grant.
Subject to shareholder approval, 251,000 options-- (CONTINUED)
- ---------------
(a) Options were granted onat average costs of $11.69 and $2.31 in 1997 and 1996,
respectively.
(b) Options were exercised at prices ranging from $1.08 to $2.31 and averaging
$1.68 in 1997 and $1.08 to $3.60 and averaging $3.43 in 1996.
(c) Prices for options outstanding at December 26,31, 1997 ranged from $1.08 to
$12.50 and averaged $10.49 with expiration dates ranging from July 1998 to
October 2003. Prices for options outstanding at December 31, 1996 ranged
from $1.08 to $4.10 and averaged $2.11 with expiration dates ranging from
May 1996 to May 2004.
(d) Options exercisable at a cost of $11.00. Shareholders will also vote on
grants to non-employee directors of 150,000 options granted under theDecember 31, 1997 and 1996 Employee Stock Option Plan, exercisable immediately, with a five
year expiration term from the date of grant. The price of these options
is $11.00 for 100,000 of the optionsaveraged $7.11 and $12.00 for the remaining
50,000.$2.18,
respectively.
Had the cost of stock option plans been determined based on the provision
of SFAS No. 123, the Company's net income and earnings per share pro forma
amounts would be as follows (in thousands):
As Reported Pro Forma
(unaudited)
Primary Fully Diluted Primary Fully Diluted
-------------- ------------- ------------- ------------(UNAUDITED)
AS REPORTED PRO FORMA
------------------ ------------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------
1996
Adjusted net income (1) $ 6,579 $ 5,040 $ 6,553 $ 5,014
============== ============= ============= ============1997
Net income............................ $11,530.. $11,530 $11,198 $11,198
======= ======= ======= =======
Net income per common shareshare........... $ .210.31 $ .160.24 $ .200.30 $ .16
============= ============= ============= ============0.23
======= ======= ======= =======
1996
Net income............................ $ 4,384 $ 4,384 $ 4,358 $ 4,358
======= ======= ======= =======
Net income per common share........... $ 0.25 $ 0.18 $ 0.24 $ 0.18
======= ======= ======= =======
1995
Net incomeincome............................ $ 3,469 $ 3,469 $ 3,468 $ 3,468
============= ============= ============= =================== ======= ======= =======
Net income per common shareshare........... $ .200.24 $ .200.20 $ .200.23 $ .20
============= ============= ============= ============
(1) See Note 30.20
======= ======= ======= =======
The above results may not be representative of the effects of SFAS No. 123
on net income for future years.
The Company applied the Black-Scholes option-pricing model to determine the
fair value of each option granted in 1997, 1996 and 1995. Below is a summary of
the assumptions used in the calculation:
Dividend Yield 0%
Expected Volatility 35%
Risk-free interest rate
1997 1996 1995
----- ----- -----
Risk-free interest rate.............................. 6.01%, 6.03% and 6.21%
Dividend yield....................................... -- -- --
Expected volatility.................................. 35.00% 35.00% 35.00%
Expected option life (in years)...................... 3.75 3.75 3.75
years
The stock options issued to key employees in 1996 were assumed to vest at a
rate of 100%.
F-19
50
INTERNATIONAL ALLIANCE49
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity in the liability for unpaid losses and loss expenses is summarized
as follows (in thousands):
1997 1996 1995
1994
-------------- ------------- ---------------- ------- -------
Balance at January 1 $ 37,002 $ 34,661 $ 29,5281............................ $41,099 $37,002 $34,661
Less: Reinsurance recoverables, net (8,914) (9,383) (8,505)
-------------- ------------- --------------net........... 8,114 8,914 9,383
------- ------- -------
Net balance at January 11...................... 32,985 28,088 25,278
21,023
-------------- ------------- --------------------- ------- -------
Incurred related to:
Current yearyear.................................. 21,839 17,216 17,297
14,753
Prior yearsyears................................... (1,157) 408 (2,180)
(2,259)
-------------- ------------- --------------------- ------- -------
Total incurredincurred............................. 20,682 17,624 15,117
12,494
-------------- ------------- --------------------- ------- -------
Paid related to:
Current yearyear.................................. 2,468 3,684 5,963
4,269
Prior yearsyears................................... 8,800 9,043 6,344
3,970
-------------- ------------- --------------------- ------- -------
Total paidpaid................................. 11,268 12,727 12,307
8,239
-------------- ------------- --------------------- ------- -------
Net balance at December 3131...................... 42,399 32,985 28,088 25,278
Plus: reinsurance recoverables, netnet........... 8,256 8,114 8,914
9,383
-------------- ------------- --------------------- ------- -------
Balance at December 31 $ 41,099 $ 37,002 $ 34,661
============== ============= ==============31.......................... $50,655 $41,099 $37,002
======= ======= =======
In 19951997 and 1994,1995, the Company experienced lower than anticipated ultimate
losses on prior years due primarily to a reduction in claims severity from that
assumed in establishing the liability for losses and loss expenses payable. The
Company's environmental exposure from continuing operations relates primarily to
its coverage of remediation related risks, thus management believes the
Company's exposure to historic pollution situations is minimal. The Company's
non-insurance environmental exposure from discontinued operations is discussed
in Note 15.
7. REINSURANCE
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurers and reinsurers. These arrangements provide the
Company with a greater diversification of business and generally limit the
maximum net loss potential on large risks. Excess of loss reinsurance contracts
in effect through December 31, 1996,1997, generally protect against individual
property and casualty losses over $200,000 and contract surety and miscellaneous
bond losses over $500,000. In addition to the excess of loss contract in effect
for contract surety business, a 50% quota share contract on the first $500,000
in losses is in effect. Workers compensation business is 75% ceded on a quota
share basis to reinsurers. The Company also maintains a statutory workers
compensation excess of loss reinsurance contract which provides statutorily
prescribed limits in excess of $200,000 for workers compensation business and
$800,000 excess of $200,000 for employers liability business. Asbestos
abatement, lead abatement, environmental consultants professional liability and
remedial action contractors business is 75% ceded on a quota share basis to
reinsurers. Catastrophe coverage is also maintained.
F-20
51
INTERNATIONAL ALLIANCE50
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 7. REINSURANCE (Continued)
-- (CONTINUED)
The impact of reinsurance is as follows (in thousands):
1997 1996 1995
1994
-------------- ------------- ---------------------- -------- --------
Premiums written:
DirectDirect...................................... $ 47,488 $ 42,420 $ 36,278
$ 37,127
AssumedAssumed..................................... 12,263 468 1,417
742
CededCeded....................................... (22,263) (11,739) (11,018)
(10,650)
-------------- ------------- --------------
Net------- ------- -------
Net...................................... $ 37,488 $ 31,149 $ 26,677
$ 27,219
============== ============= ===================== ======= =======
Premiums earned:
DirectDirect...................................... $ 39,38848,085 $ 39,311 $ 36,005
$ 34,255
Assumed 591Assumed..................................... 7,647 576 1,507
414
CededCeded....................................... (18,494) (12,236) (10,550)
(11,301)
-------------- ------------- --------------
Net------- ------- -------
Net...................................... $ 27,74337,238 $ 27,651 $ 26,962
$ 23,368
============== ============= ===================== ======= =======
Losses and loss expense incurred:
DirectDirect...................................... $ 20,135 $ 18,618 $ 16,342
$ 15,088
AssumedAssumed..................................... 2,820 210 1,223
(65)
CededCeded....................................... (2,273) (1,204) (2,448)
(2,529)
-------------- ------------- --------------
Net------- ------- -------
Net...................................... $ 20,682 $ 17,624 $ 15,117
$ 12,494
============== ============= ===================== ======= =======
The reinsurance payables were $7,828,000, $2,869,000 $2,259,000 and $2,056,000$2,259,000 at
December 31, 1997, 1996 1995 and 1994,1995, respectively.
Reinsurance recoverables were comprised of the following as of December 31
(in thousands):
1997 1996 1995
1994
-------------- ------------- --------------------- ------- -------
ReceivablesRecoverables on unpaid losses and loss
expensesexpenses...................................... $ 8,1138,256 $ 8,9148,114 $ 9,3838,914
Receivables on ceding commissions and other 2,703other..... 5,851 2,702 2,892 1,026
Receivables on paid losses and expensesexpenses......... 1,108 369 841
478
-------------- ------------- --------------
$ 11,185 $ 12,647 $ 10,887
============== ============= ==============------- ------- -------
$15,215 $11,185 $12,647
======= ======= =======
The Company evaluates the financial condition of its reinsurers and
establishes a valuation allowance as reinsurance receivables are deemed
uncollectible. During 1996,1997, the majority of ceded amounts were ceded to Republic
Western Insurance Company, Reliance Insurance Company, General Reinsurance
Corporation, Kemper Insurance Company and RelianceGulf Insurance Company. The Company
monitors concentrations of risks arising from similar geographic regions or
activities to minimize its exposure to significant losses from catastrophic
events.
8. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs were as follows at December
31, (in thousands):
1997 1996 1995
------- ------- -------
Balance, beginning of year....................... $ 4,345 $ 3,428 $ 3,726
Policy acquisition costs deferred................ 9,803 8,616 7,476
Amortized to expense during the year............. (9,670) (7,699) (7,774)
------ ------ ------
Balance, end of year........................... $ 4,478 $ 4,345 $ 3,428
====== ====== ======
F-21
52
INTERNATIONAL ALLIANCE51
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 8. DEFERRED POLICY ACQUISITION COSTS
At December 31, 1996 changes in deferred policy acquisition costs were as
follows (in thousands):
1996 1995 1994
-------------- ------------- --------------
Balance, beginning of year $ 3,428 $ 3,726 $ 2,406
Policy acquisition costs deferred 8,616 7,476 6,748
Amortized to expense during the year (7,699) (7,774) (5,428)
-------------- ------------- --------------
Balance, end of year $ 4,345 $ 3,428 $ 3,726
============== ============= ==============
-- (CONTINUED)
9. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limits the payment of dividends by a 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 31.31,
which was $5.2 million at December 31, 1997.
The consolidated and combined financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The Company's
insurance subsidiaries have filedfile annual financial statements with the Ohio Department
of Insurance and Utah Department of Insurance
respectively, and are prepared on the basis of
accounting practices prescribed by such regulatory authorities, which differ
from GAAP. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
prescribed. All material transactions recorded by the Company's insurance
subsidiaries are in accordance with prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital ("RBC") formula. This model act requires every property and casualty
insurer to calculate its total adjusted capital and RBC requirement, and
provides for an insurance commissioner to intervene if the insurer experiences
financial difficulty. The model act became law in Ohio in March 1996, and in
Utah in April 1996, states where certain subsidiaries of the Company are
domiciled. The RBC formula includes components for asset risk, liability risk,
interest rate exposure and other factors. The Company's insurance subsidiaries
exceeded all required RBC levels foras of December 31, 19961997 and 1995.1996.
CSC's statutory net income for the three years ended December 31, 1997, 1996 and
1995 was $1,916,000, $3,681,000approximately $5.2 million, $1.9 million and $1,804,000,$3.7 million,
respectively, and the statutory capital and surplus as of December 31, 1997 and
1996 was $25,954,000, $22,034,000approximately $31.5 million and $20,123,000,$26.0 million, respectively.
F-22
53
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES
A summary of income tax expense (benefit) included in the Consolidated and
Combined Statements of Income is as follows (in thousands):
1997 1996 1995
1994
-------------- ------------- ----------------- ------ ------
Continuing operationsoperations:
Current:
Federal $ 1,654 $ 2,121 $ 1,289Federal.................................. $6,523 $1,654 $2,121
State and Locallocal.......................... 715 13 - -
-------------- ------------- ---------------
----- ----- -----
7,238 1,667 2,121
1,289
Deferred:
FederalFederal.................................. (897) (27) (699)
55
-------------- ------------- -------------State and local.......................... (61) -- --
----- ----- -----
(958) (27) (699)
----- ----- -----
Total continuing operationsoperations................. 6,280 1,640 1,422
1,344
Discontinued operationsoperations....................... (621) 91 - -
-------------- ------------- -------------
$ 1,731 $ 1,422 $ 1,344
============== ============= =============--
----- ----- -----
$5,659 $1,731 $1,422
===== ===== =====
F-22
52
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal statutory
income tax rate to income from continuing operations before income taxes, as
follows (in thousands):
1997 1996 1995
1994
-------------- ------------- ------------------- ------ ------
Tax at statutory rate (34%) $ 2,061 $ 1,663 $ 1,647........................ $6,475 $2,061 $1,663
State taxes (net of federal benefit)............... 411 -- --
Change in valuation allowanceallowance...................... (875) (589) (169) 434
Tax exempt interest and dividends received
deductiondeduction........................................ (78) (33) (106)
(123)
Nontaxable income on participation
transaction - - (274)Nondeductible goodwill............................. 383 -- --
Change in estimated liabilitiesliabilities.................... -- 196 - ---
Other, netnet......................................... (36) 5 34
(340)
-------------- ------------- ------------------- ------ ------
Provision for income taxtaxes from continuing
operations $ 1,640 $ 1,422 $ 1,344
============== ============= =============operations....................................... $6,280 $1,640 $1,422
====== ====== ======
Effective income tax raterate.......................... 33.0% 27.1% 29.1%
27.7%
============== ============= =================== ====== ======
F-23
54
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
19961997 and 1995,1996, are as follows (in thousands):
1997 1996
1995
-------------- ------------------ -------
Deferred tax assets:
--------------------
Loss expenses payable discountingdiscounting............................. $ 2,1762,852 $ 1,9572,176
Net operating loss carryforwardscarryforwards.............................. 2,696 1,136 1,235
Unearned premiums not deductibledeductible.............................. 1,122 1,105
1,063Deferred compensation......................................... 632 --
Allowance for doubtful accounts............................... 388 --
Other deferred tax assetsassets..................................... 97 151
143
-------------- ------------------- ------
Total gross deferred tax assetsassets............................ 7,787 4,568 4,398
Less: valuation allowanceallowance.................................. (2,135) (1,379)
(1,968)
-------------- ------------------- ------
Net deferred tax assetsassets.................................... 5,652 3,189
2,430
-------------- ------------------- ------
Deferred tax liabilities:
-------------------------Change in accounting method................................... 3,199 --
Unrealized appreciation on investmentsinvestments........................ 618 1,518 1,219
Deferred policy acquisition costscosts............................. 1,523 1,477
1,165
Reinsurance recoverablerecoverable....................................... 408 302 -
Other deferred tax liabilitiesliabilities................................ 235 219
99
-------------- ------------------- ------
Total gross deferred tax liabilitiesliabilities....................... 5,983 3,516
2,483
-------------- ------------------- ------
Net deferred tax liability, included in income taxes in the
consolidated and combined balance sheetssheets................... $ 331 $ 327
$ 53
============== =================== ======
Net deferred tax liability attributable to discontinued
operations, included in net assets held for disposaldisposal....... $ 1,340-- $ -
============== =============1,340
The company had net operating loss ("NOL") carryforwards of approximately
$3,300,000$7,500,000 and $3,600,000$3,300,000 at December 31, 19961997 and 1995,1996, respectively, from the
separate return years of Evergreen National Indemnity
Corporation ("ENIC").certain acquired entities. These losses are subject to
limitations regarding the offset of the company's future taxable income and will
begin to expire in 2007.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
determines a valuation allowance based on their analysis of amounts available in
the statutory carryback period, consideration of future deductible amounts, and
assessment of ENIC'sthe
F-23
53
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
separate company profitability.profitability of certain acquired entities. The Company has
established valuation allowances for portions of ENIC'sacquired NOL carryforwards and
other deferred tax assets. The net change in the valuation allowance for the
years ended December 31, 19961997 and 19951996 was a increase of $756,000 and decrease
of $589,000, and $169,000, respectively. Even though the Company has had taxable income over the last several
years, significant income in some instances has been attributable to
non-recurring transactions and thus there is no assurance that the
Company will remain profitable in future years. However, during 1996,
ENIC obtained all licenses necessary to fully operate, commenced
underwriting insurance, and reported two consecutive years of
profitability. As a result, management determined that aThe portion of the valuation allowance related to ENIC's NOL carryforwards was no longer
required. Otherwise, the Company maintains a policy of recognizing
otherfor deferred
tax assets recoverable in the carryback periodfor which subsequently recognized tax benefits will be allocated to
reduce goodwill of acquired entities is $756,000 and does
not consider future taxable income in excess.
F-24
55
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES$0 at December 31, 1997 and
1996, respectively.
11. NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
11. SHORT-TERM BORROWINGS, NOTE PAYABLE, BANK DEBT AND CAPITALIZED LEASES
Short-Term Borrowings
---------------------
The Company securedmaintains lines of credit with several banks. The Company's
primary line of credit is a $6,000,000$50,000,000 revolving credit facility used for additional
working capitalwith several
financial institutions, with Bank of America as Agent, and other funding needs. Up to $4,500,000 of the credit
facility is available for the issuance of standby letters of credit.expires October 3,
2000. At December 31, 1996,1997, approximately $8,200,000 was outstanding under such
credit facility. The Company's lines of credit are subject to normal banking
terms and conditions and the Company had issued $2,400,000 in standby letters
of credit. The unused portion of the facility is available for cash
borrowings. There were no cash borrowings under the credit facility
during 1996 and 1995.
The credit facility provides for the maintenance of certain restrictive
covenants including, among others, minimum workingCompany's subsidiaries capital levels,
maintaining current and fixed charges ratios and a predetermined level
of interest coverage. The Company is also restricted from making any
dividend payments and incurring additional debt. This facility is
collateralized by certain Company assets.
Notestock are pledged as
collateral.
Notes Payable, Debt and Capitalized Leases
-----------------------------------
NoteNotes payable, bank debt and capitalized leases, consists of the following
(in thousands):
DecemberDECEMBER 31
--------------------------------------------------
1997 1996
1995
------------- --------------------- -------
Promissory notenotes payable to a shareholder in quarterly installments of
$400,000 plus interest, based on 3 month LIBOR (5.51% at December 31,
1996) compounded daily, through December 15, 1999shareholders, with rates from
5.9% to 16.0%, due 1998 to 2012.......................... $ 8,523 $ 3,200
$ -Other notes payable, with rates from 6.0% to 14.8%, due
1998 to 2005............................................. 3,311 --
Revolving credit facility, effective rate of 8.50%......... 8,200 --
Capitalized leases, secured by equipment,various rates, payable monthlyin installments
through 19972001............................................. 131 11
47
------------- --------------Other...................................................... 147 --
------- -------
$20,312 $ 3,211
$ 47
============= ===================== =======
At December 31, 1996,1997 aggregate maturities of notenotes payable, bank debt and
capitalized leases, were as follows (in thousands):
YEARS ENDING
DECEMBER 31,
------------- -----------------------------------------------------------
1997 $ 1,611
1998 1,600
-------------
$ 3,211
=============1998................................................ $16,997
1999................................................ 873
2000................................................ 395
2001................................................ 542
2002................................................ 270
Thereafter.......................................... 1,235
-------
$20,312
=======
Management believes that the carrying amounts of short-term borrowings,
notenotes payable, bank debt
and capitalized leases recorded at December 31, 19961997 were not impaired and
approximate fair values.
F-25F-24
56
INTERNATIONAL ALLIANCE54
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases certain of its premises and equipment under various
operating lease agreements. At December 31, 1996,1997, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997 $ 1,277
1998 1,202
1999 583
2000 563
2001 563
Thereafter 2,793
-------------
$ 6,981
=============
YEARS ENDING
DECEMBER 31,
- -----------------------------------------------------------
1998................................................ $ 6,800
1999................................................ 6,007
2000................................................ 5,052
2001................................................ 3,955
2002................................................ 3,260
Thereafter.......................................... 10,689
-------
$35,763
=======
Total rental expense incurred under operating leases was approximately
$3,588,000, $454,000 and $411,000 in 1997, 1996 and $331,000 in 1996, 1995, and 1994, respectively.
Other
-----
In the ordinary course of business, the Company is a defendant in various
lawsuits. In the opinion of management, the effects, if any, of such lawsuits
are not expected to be material to the Company's results of operations or
financial position.
The Company has profit sharing plans covering substantially all of its
employees. Participating employees may elect to contribute, on a tax deferred
basis, a portion of their compensation, in accordance with Section 401(k) of the
Internal Revenue Code. Employer contributions made to the plan for 1997, 1996
1995 and 1994,1995, amounted to approximately $674,000, $240,000 $141,000 and $111,000,$141,000,
respectively.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company recorded the acquisition of RESI as a non-cash transaction
consisting of a $4,000,000 promissory note and recapitalization of shareholders'
equity of $16,244,000. Additionally, during 1996, the Company acquired, in
exchange for 792,500 shares of its common stock, and other consideration, 100%
of SMR and ECI, which were also recorded as non-cash transactions.
F-26
57
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
13. SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued)
In December 1994, ENIC participated in a transaction whereby ENIC obtained
an agreed upon amount of net assets of an unrelated party as
consideration in completingCash Paid During the sale and the related settlements of
debt of two unrelated parties. The transaction included a contingent
receivable of up to $2,900,000 due ENIC from the unrelated party. Based
on the performance of the insurance operations sold, it was determined
that $807,000 and $1,150,000 be recognized as revenue during 1994 and
1996, respectively. ENIC does not have any future obligations with
respect to the insurance operations under the terms of the transaction
agreements.Year for (in thousands):
CASH PAID DURING THE YEAR FOR:1997 1996 1995
1994
-------------- ------------- -------------------- ------ ------
INTERESTInterest........................................... $ 348 $ 60 $ 216
$ 469
============== ============= =============
INCOME TAXES $ 1,290====== ====== ======
Income Taxes....................................... $5,753 $1,290 $ 128
$ 64
============== ============= =================== ====== ======
14. RELATED PARTIES
In October 1996,The Company's Executive Vice President ("EVP"), who is also a director, and
one of the Company's Chairman purchased 1,900,000 shares of
common stock, and warrants to purchase an additional 5,700,000 shares
of common stock at exercise prices ranging from $2.625 to $3.875 per
share, for an aggregate price of $4,988,000. Additionally, the Chairman
held warrants to purchase 240,000 shares of common stock at $3.60 per
share
The Company's Chief Financial Officer ("CFO") wasSenior Vice Presidents were each a one-third owner of
SMR. Among the liabilities assumed in connection with the SMR
acquisition is a deferred compensation arrangement to which the CFO is
entitled to receive 40% of the collections from the acquired
receivables of SMR.
In addition, in connection with the SMR transaction,acquisition, the CFOEVP received 195,600
shares of common stock and 293,400 warrants to purchase additional shares of
common stock at an exercise price of $10.375. The office building utilized by
SMR Business Services Co. is leased under a ten-year lease from a partnership in
which the CFO isEVP and one of the Senior Vice President's are each indirectly, a
one-third owner.
The Company has issued six $500,000 bonds covering certain loans obtained
by an unrelated party, maturing from 1996 and 2002. Collateral for
these bonds includes the personal indemnification of an indirect
shareholder of the Company.F-25
55
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's investment portfolios include loans to business organizations
associated with a relative of a shareholder of the Company, which aggregate
$2,900,000.$1,200,000. These loans provide for interest payments of 9% per annum only until
maturity, which range from December 31, 19971998 through April 30, 1999.
The stockEVP and one of ECI,the Senior Vice President's are partners (among others)
in SMR & Co. CPA, which was acquired by the Company, was 45% owned by the
spouse of an officer ofbuys services from a subsidiary of the Company.
F-27
58
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCollectively, these two officers hold a 9% interest in the partnership.
The Company has a $225,000, non-interest bearing note receivable from Sofia
Management Ltd., a 5% shareholder of the Company.
15. SUBSEQUENT EVENTSDIVESTITURES
In February 1997, the Company signed a letter of intent to sell the
Company's Environmental Services business. The sale is subject to a
definitive agreement and various governmental and regulatory approvals.
TheIn July 1997, the Company anticipates thatsold the
sale will be completed during 1997 and
will realize the net carrying valuemajority of the net assets held for
disposal.
In accordance with the Company's intent to sell theits environmental services business, and in September 1997, sold its
remaining environmental operations. Taken together, these transactions for cash
and notes resulted in a net loss of $572,000. The Company's contingent liability
is limited to $1.5 million in connection with such divestitures. Management does
not believe the related resultsCompany will experience a loss in connection with such
contingencies.
In December 1997, the Company sold Environmental and Commercial Insurance
Agency, Inc. and Environmental and Commercial Insurance Agency of operations have been reflectedLA, Inc. for
cash consideration, resulting in a gain of approximately $171,000.
16. SUBSEQUENT EVENTS
On January 2, 1998, the Company completed the acquisition of Bass
Consultants, Inc., located in Houston, Texas, for 626,966 shares of common
stock. Bass Consultants, Inc. provides benefits administration services.
On January 6, 1998, the Company completed the acquisition of Rootberg
Business Services, Inc., located in in Chicago, Illinois, for $5,100,000 in cash
and 482,353 shares of restricted stock. Rootberg Business Services, Inc.
provides accounting and business services.
On January 15, 1998, the Company announced it had entered into agreements
to acquire three accounting firms. The firms involved are (a) Braunsdorf,
Carlson & Clinkinbeard, CPA's P.A. and Bushman & Associates, CPA's P.A. ("The
BCC Group"), of Topeka, Kansas, (b) Kaufman Davis, Inc., of Bethesda, Maryland,
and (c) Seitz, Kate, Medve, Inc., of Cleveland, Ohio. On January 30, 1998, the
Company completed the acquisition of the BCC Group and Seitz, Kate, Medve, Inc.
The BCC Group serves client niches in construction, low-income housing,
nonprofit and government, credit unions, hospitality, retirement homes, and
litigation support. Kaufman Davis, Inc. provides accounting and management
consulting services. Seitz, Kate, Medve, Inc. provides financial, tax, estate
and investment planning services. The combined cost of these transactions is a
maximum of $4,600,000 in cash and a maximum of $6,200,000 of restricted Company
common stock.
On February 6, 1998, in connection with a private placement of 5,000,000 of
the Company's resultsCommon Stock consisting of operations as3,800,000 newly-issued shares and
1,200,000 shares of outstanding Common Stock offered by certain selling
shareholders, the Company received a discontinued operationsubscription for 500,000 shares from an
affiliate of the year ended December 31, 1996. Included in discontinued operationsCompany's Chairman, President and Chief Executive Officer. The
purchase of these shares by one of the Company's largest shareholders, Westbury
(Bermuda) Ltd. is conditioned, among other things, to shareholder approval at
the following (in thousands):
Revenues $ 9,202
=============
Income before taxes $ 53
Income tax provision 91
-------------
Net loss $ (38)
=============
Net assets of the discontinued operations at December 31, 1996 consists of
(in thousands):
Cash $ 2,375
Accounts receivable, net 7,218
Property, plant and equipment, net 20,598
Excess of cost over net assets of businesses acquired, net 3,305
Other assets 1,074
Accounts payable (3,959)
Accrued environmental costs (3,203)
Accrued expenses and other liabilities (4,409)
-------------
$ 22,999
=============
AccrualsAnnual Meeting scheduled for investigatory and remediation costs are recorded when it is
probable that a liability has been incurred and the amount of loss can
be reasonably estimated. Accrued costs include investigative,
administrative, legal and remediation costs associated with site
clean-up. Environmental compliance costs including maintenance,
monitoring and similar costs are expensed as incurred.
F-28April 30, 1998.
F-26
59
INTERNATIONAL ALLIANCE56
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 15. SUBSEQUENT EVENTS (Continued)
The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and
considers factors such as existing technology, presently enacted laws
and regulations, and prior experience in remediation of contaminated
sites. While the current law potentially imposes joint and several
liability upon each party at any Superfund site, the Company's
contribution to clean up these sites is expected to be limited, given
the number of other companies which have also been named as potentially
responsible parties, the volumes of waste involved, and that most of
these matters are indemnified by the previous owners of certain RESI
facilities. A reasonable basis for apportionment of costs among
responsible parties is determined and the likelihood of contribution by
other parties is established. If it is considered probable that the
Company will only have to pay its expected share of the total site
cleanup, the liability reflects the Company's expected share. In
determining the probability of contribution, the Company considers the
solvency of the parties, whether responsibility is being disputed, the
terms of any existing agreements, and experience to date regarding
similar matters. These liabilities do not take into account any claims
for recoveries from insurance or third parties and are not discounted.
As assessments and remediation progress at individual sites, these
liabilities are reviewed periodically and adjusted to reflect
additional technical and legal information which becomes available.
Actual costs to be incurred at identified sites in future periods may
vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. The Company believes it has sufficiently
reserved for all costs of remediation.
On January 7, 1997, the Company completed the acquisition of the assets
and business of Midwest Indemnity Corporation ("Midwest") located in
Skokie, Illinois for a total cost of approximately $9,900,000,
consisting of 407,256 shares of restricted common stock, $3,250,000 in
cash and $1,750,000 in non-interest bearing notes. Midwest markets
environmental and surety bond products throughout the United States
through a distribution system of agents and subagents.
On February 24, the Company completed the acquisition of Midland
Consultants, Inc. ("Midland"), located in Brooklyn, Ohio, for 87,500
shares of restricted common stock, $208,000 in cash and warrants to
purchase 20,000 shares of common stock at an exercise price of $11.625
per share exercisable through January 31, 2000. Midland provides
specialized employment services.
On March 3, 1997, the Company consummated its acquisition of M&N Risk
Management, Inc. and M&N Enterprises, Inc. (the "M&N Companies") and
MFC, Inc. of Cleveland, Ohio for 384,600 shares of restricted common
stock, $1,000,000 cash and 900,000 warrants at $13 per share
exercisable until March 3, 2000. The M&N Companies provide employers
with a turn-key approach to integrate workers' compensation actuarial
analysis and underwriting capabilities with claims administration.
On March 3, 1997, the Company announced it had entered into an agreement
to acquire The Benefits Group Agency, Inc. ("The Benefits Group"),
located in Cleveland, Ohio, for 395,000 shares of restricted common
stock, $2,500,000 in cash and 500,000 warrants to purchase common stock
at $12.50 per share over a three year period. The transaction is
subject to a definitive agreement and is expected to close by March 31,
1997. The Benefits Group is a full-service corporate benefits
administration company.
F-29
60
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
16.-- (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly financial data are summarized as follows (amounts in thousands,
except per share amounts):
1996 March1997 MARCH 31, JuneJUNE 30, SeptemberSEPTEMBER 30, DecemberDECEMBER 31,
- --------------------------------------------- --------- ---------------------- ------------- -------------- --------------------------
RevenuesRevenues..................................... $16,296 $ 21,088 $27,474 $ 43,372
======= ======= ======= =======
Income from continuing operations............ $ 2,109 $ 2,233 $ 3,415 $ 5,008
Income (loss) from discontinued operations... (534) (179) 50 (572)
------- ------- ------- -------
Net income................................. $ 1,575 $ 2,054 $ 3,465 $ 4,436
======= ======= ======= =======
Earnings per common share:
Basic --
Continuing operations................... $ 0.06 $ 0.06 $ 0.09 $ 0.13
Discontinued operations................. (0.01) -- -- (0.02)
------- ------- ------- -------
Net income per share....................... $ 0.05 0.06 0.09 0.11
======= ======= ======= =======
Earnings per common share:
Diluted --
Continuing operations................... $ 0.04 $ 0.05 $ 0.07 $ 0.10
Discontinued operations................. (0.01) (0.01) -- (0.01)
------- ------- ------- -------
Net income per share....................... $ 0.03 $ 0.04 $ 0.07 $ 0.09
======= ======= ======= =======
Weighted average common shares............... 34,507 35,817 37,927 39,293
======= ======= ======= =======
Weighted average common shares and diluted
potential common shares:................... 48,059 47,042 48,992 50,494
======= ======= ======= =======
1996 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------- --------- -------- ------------- ------------
Revenues..................................... $ 9,320 $ 7,346 $ 9,389 $ 9,714
============== ============= ============= ===================== ======= ======= =======
Income from continuing operationsoperations............ $ 655 $ 771 $ 839 $ 2,157
Loss from discontinued operation - - -operations............ -- -- -- (38)
-------------- ------------- ------------- --------------------- ------- ------- -------
Net incomeincome................................. $ 655 $ 771 $ 839 $ 2,119
============== ============= ============= ===================== ======= ======= =======
Earnings per common share:
Primary -Basic --
Continuing operations $ .04operations................... $ .04 $ .05 $ .08.06 $ .09
Discontinued operations - - - -
-------------- ------------- ------------- --------------operations................. -- -- -- --
------- ------- ------- -------
Net income per share $ .04share....................... $ .04 $ .05 $ .08
============== ============= ============= ==============.06 $ .09
======= ======= ======= =======
Earnings per common share:
Fully Diluted ---
Continuing operationsoperations................... $ .04 $ .04.05 $ .03 $ .06
Discontinued operations................. -- -- -- --
------- ------- ------- -------
Net income per share....................... $ .04 $ .04
Discontinued operations - - - -
-------------- ------------- ------------- --------------
Net income per share.05 $ .04.03 $ .04 $ .04 $ .04
============== ============= ============= ==============.06
======= ======= ======= =======
Weighted average common and
common share equivalents, primary
and fully diluted: 16,956 16,956 16,956 32,213
============== ============= ============= =============
1995 March 31, June 30, September 30, December 31,
-------- -------------- ------------- -------------- -------------
Revenues $ 7,971 $ 8,309 $ 6,496 $ 8,163
============== ============= ============= =============
Net income (loss) $ 508 $ (220) $ 101 $ 3,080
============== ============= ============= =============
Earnings per common share:
Primary $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============
Fully diluted $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============shares............... 14,760 14,760 14,760 23,850
======= ======= ======= =======
Weighted average common shares and diluted
potential common share equivalents, primary
and fully diluted:shares:................... 16,956 16,956 16,956 16,956
============== ============= ============= =============28,100 33,703
======= ======= ======= =======
The increase in net income in the fourth quarter of 1996 and 1995 are a
result of the Company's historical policy of engaging an independent
actuary to calculate the loss reserves at year end and settling the
Company's reinsurance treaties in the fourth quarter. For future
periods, this analysis will be completed by management on a
quarterly basis.
F-30F-27
61
INTERNATIONAL ALLIANCE57
CENTURY BUSINESS SERVICES, INC.
SCHEDULE I--SUMMARYI -- SUMMARY OF INVESTMENTS--OTHERINVESTMENT -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(In thousands)1997
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D
- -------------------------------------------------- -------- -------- -------- ------------------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---- ------ -------------------------------------------------- -------- -------- -------------
Fixed maturities--held toin maturity:
Bonds:
U.S. government and government agencies and
authoritiesauthorities.................................. $ 6,1366,971 $ 6,0997,001 $ 6,136
States, municipalities and
political subdivisions -- -- --6,971
Corporate securities 8,850 8,772 8,850securities............................ 6,810 6,790 6,810
Foreign corporate bonds......................... 317 333 317
Mortgage-backed securities 495 505 495securities...................... 430 438 430
Fixed maturities--available for sale:
Bonds:
U.S. government and government agencies and
authorities 16,067 16,198 16,198authorities.................................. 7,681 7,843 7,843
Corporate securities 10,962 10,983 10,983securities............................ 16,817 17,036 17,036
Foreign corporate bonds......................... 1,009 977 977
Mortgage-backed securities 8,092 8,290 8,290
------- ------- -------securities...................... 13,402 13,735 13,735
Other-assets backed securities.................. 11,842 11,954 11,954
------ ------ ------
Total fixed maturities 50,602 50,847 50,952
------- ------- -------maturities..................... 65,279 66,107 66,073
------ ------ ------
Equity securities:
Common stock:Stock:
Public utilities 209 189 189utilities................................ 311 364 364
Banks, trust and insurance companies 225 252 252Companies............ 46 82 82
Industrial, miscellaneous and all other 1,178 6,014 6,014other......... 1,265 2,577 2,577
Nonredeemable preferred stocks 2,737 2,758 2,758
------- ------- -------
TOTAL EQUITY SECURITIES 4,349 9,213 9,213
------- ------- -------stocks.................... 4,541 4,570 4,570
------ ------ ------
Total equity securities.................... 6,163 7,593 7,593
------ ------ ------
Mortgage loans 3,685 3,685on real estate..................... 1,839 1,839
Short-term investments 4,799 4,799
------- -------investments............................ 4,215 4,215
------ ------
Total investments $63,435 $68,649
======= =======investments.......................... $77,496 $79,720
====== ======
See accompanying Independent Auditors' Report
F-31Report.
F-28
62
INTERNATIONAL ALLIANCE58
CENTURY BUSINESS SERVICES, INC.
SCHEDULE IV--REINSURANCEIII -- SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND 1994
(In thousands)(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- --------------------------------- -------- ------------- ------------ ---------- --------
FUTURE POLICY
BENEFITS, OTHER
DEFERRED LOSSES POLICY
POLICY CLAIM AND CLAIMS AND
ACQUISITION LOSSES UNEARNED BENEFITS PREMIUM
SEGMENT COST EXPENSE PREMIUMS PAYABLES REVENUE
- --------------------------------- -------- -------- -------- --------
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------- ---------------------- ------------ ------ ---------- --------
Year endedEnded:
December 31, 1996
Property--Casualty Earned
Premiums $39,388 $12,236 $591 $27,743 2.13%
Year ended1997.............. $ 4,478 $50,655 $ 22,656 N/A $37,238
December 31, 1995
Property--Casualty Earned
Premiums $36,005 $10,550 $1,507 $26,962 5.59%
Year ended1996.............. 4,345 41,009 18,637 N/A 27,651
December 31, 1994
Property--Casualty Earned
Premiums $34,255 $11,3011995.............. 3,428 37,002 15,636 N/A 26,962
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------- ------------- ------------ ---------- --------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER DIRECT
INVESTMENT LOSSES AND ACQUISITION OPERATING PREMIUMS
INCOME LOSS EXPENSE COSTS EXPENSES WRITTEN
-------- ------------- ------------ ---------- --------
Year Ended:
December 31, 1997.............. $ 414 $23,368 1.77%4,524 $20,682 $ 9,670 $ 2,677 $47,488
December 31, 1996.............. 3,564 17,624 7,699 2,951 42,420
December 31, 1995.............. 3,341 15,117 7,774 3,157 36,278
See accompanying Independent Auditors' Report
F-32Report.
F-29
63
INTERNATIONAL ALLIANCE59
CENTURY BUSINESS SERVICES, INC.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
FOR THEIV -- REINSURANCE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND 1994
(In thousands)(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
COLUMN G- ------------------------------------- -------- -------- -------- -------- --------
-------- --------
FUTURE POLICY
DEFERRED BENEFITS, LOSSESPERCENTAGE
ASSUMED OF
CEDED TO FROM AMOUNT
GROSS OTHER POLICY
POLICY CLAIMS AND CLAIMS ANDOTHER NET ACQUISITION LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COST EXPENSES PREMIUMS PAYABLES REVENUE INCOME
------- ----ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- -------- -------- ------- -------------- --------
Year Ended:ended December 31, 1997
Property -- Casualty Earned
Premiums........................... $48,085 $18,494 $ 7,647 $37,238 20.54%
Year ended December 31, 1996
$4,345 $41,099 $18,637 N/A $27,743 $3,564Property -- Casualty Earned
Premiums........................... $39,311 $12,236 $ 576 $27,651 2.08%
Year ended December 31, 1995
$3,428 $37,002 $15,636 N/AProperty -- Casualty Earned
Premiums........................... $36,005 $10,550 $ 1,507 $26,962 $3,341
December 31, 1994 $3,725 $34,661 $15,453 N/A $23,368 $2,477
COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------- -------- --------
AMORTIZATION OTHER DIRECT
LOSSES AND OF DEFERRED POLICY OPERATING PREMIUMS
LOSS EXPENSES ACQUISITION COSTS EXPENSES WRITTEN
------------- ----------------- --------- --------
Year Ended:
December 31, 1996 $17,624 $7,699 $4,384 $42,420
December 31, 1995 $15,117 $7,774 $3,157 $36,278
December 31, 1994 $12,494 $5,428 $4,544 $37,1275.59%
See accompanying Independent Auditor's Report
F-33
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, IASI has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL ALLIANCE SERVICES, INC.
(Registrant)
By: /s/ Edward F. Feighan
------------------------------
Edward F. Feighan
Chief Executive Officer
and President
March 31, 1997
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below on this Annual Report hereby constitutes and appoints Edward F.
Feighan, Gregory J. Skoda and Craig L. Stout, and each of them, with full power
to act without the other, his true and lawful attorney-in-fact and agent, with
full power of substitution for him and his name, place and stead, in any and all
capacities (until revoked in writing), to sign any and all amendments to this
Annual Report of International Alliance Services, Inc. and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite and necessary fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that each of said
attorneys-in-fact and agents, 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 the following persons on
behalf of International Alliance Services, Inc. and in the capacities and on the
dates indicated.
/s/ Michael G. DeGroote
- ------------------------------------ -----------------------------------------
Michael G. DeGroote Harve A. Ferrill
Chairman of the Board and Director Director
March 31, 1997
/s/ Edward F. Feighan /s/ Douglas R. Gowland
- ------------------------------------ -----------------------------------------
Edward F. Feighan Douglas R. Gowland
Chief Executive Officer, President Vice President - Environmental Operations
and Director (Principal Executive Officer) and Director
March 31, 1997 March 31, 1997
/s/ Hugh P. Lowenstein /s/ Richard C. Rochon
- ------------------------------------ -----------------------------------------
Hugh P. Lowenstein Richard C. Rochon
Director Director
March 31, 1997 March 31, 1997
/s/ Gregory J. Skoda /s/ Craig L. Stout
- ------------------------------------ -----------------------------------------
Gregory J. Skoda Craig L. Stout
Executive Vice President and Chief Operating Officer
Chief Financial Officer and Director
(Principal Financial and Accounting Officer) March 31, 1997
March 31, 1997
65
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
IASI (filed as Exhibit 3.1 to IASI'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 IASI dated October 18, 1996.
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI'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 IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
66
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates documents filed herewith.Auditors' Report.
F-30