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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-25890
CENTURY BUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
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(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OHIO 44125
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 $371,104,081 as of February 13, 1998. The number
of outstanding shares of the Registrant's common stock is 47,406,738 shares as
of February 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative to
the 1998 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration statements.
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CENTURY BUSINESS SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
Items 1 and 2. Business and Properties................................................ 3
Item 3. Legal Proceedings...................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters... 17
Item 6. Selected Financial Data................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 19
Item 7A. Quantitative and Qualitative Information About Market Risk............. 26
Item 8. Financial Statements and Supplementary Data............................ 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 26
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 26
Item 11. Executive Compensation................................................. 26
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 26
Item 13. Certain Relationships and Related Transactions......................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 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 "CENTURY" OR THE "COMPANY" SHALL MEAN CENTURY BUSINESS
SERVICES, INC., A DELAWARE CORPORATION, AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
Century is a diversified services company which, acting through its
subsidiaries, provides outsourced business services, including specialty
insurance services, to small and medium sized commercial enterprises throughout
the United States.
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; 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, Century completed two acquisitions (the "Merger
Transactions") pursuant to which it acquired, through a reverse merger, Century
Surety Company ("CSC") and its subsidiaries (together with CSC, the "CSC
Group"), which includes three insurance companies, and Commercial Surety Agency,
Inc. d/b/a Century Surety Underwriters ("CSU"), an insurance agency that markets
surety bonds.
In December 1996, the Company acquired SMR & Co. Business Services ("SMR").
Through SMR, Century provides a wide range of outsourced business services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administration to individuals and small and medium sized
commercial enterprises primarily in Ohio. Pursuant to a strategic redirection of
the Company initiated in November 1996, the Company began its acquisition
program to expand its operations rapidly in the outsourced business services
industry from its existing specialty insurance platform.
During 1997, the Company acquired the businesses of 39 companies
representing over $134 million in annualized revenues at the time of
acquisition. The majority of these acquisitions have been accounted for under
the purchase method of accounting. The Company anticipates future significant
acquisitions will be accounted for, when possible, under the pooling of
interests method of accounting. During 1997, the Company's acquisitions resulted
in significant increases in goodwill and other intangible assets, and the
Company anticipates that such increases will continue as a result of future
acquisitions. The excess of cost over the fair value of net assets of businesses
acquired (goodwill), was approximately $89.856 million at December 31, 1997,
representing approximately 31% of the Company's total assets. The Company
amortizes goodwill on a straight-line basis over periods not exceeding 30 years.
The Company has completed from December 31, 1997 through February 17, 1998,
or has publicly announced as pending, an additional seven acquisitions
representing over $46 million in annualized revenues at the time of acquisition.
These acquisitions are not included in the results of operations for the period
ended December 31, 1997. The Company believes that substantial additional
acquisition opportunities exist in the outsourced business services industry.
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The Company strategy is to grow aggressively as a diversified services
company by expanding its recently acquired outsourced business services and
specialty insurance operations through internal growth and additional
acquisitions in such industries. See "-- Business Strategy."
Century was formed as a Delaware corporation in 1987 under the name Stout
Associates, Inc. ("Stout") and primarily supplied hazardous waste services. In
1992, the Company was acquired by Republic Industries, Inc. ("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"), to
the stockholders of record of RII (the "Spin-off"). At such time, the Company
was named "Republic Environmental Systems, Inc." and was traded on the Nasdaq
National Market under the symbol "RESI." On June 24, 1996, the Company began
trading under the symbol "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,
the Company declared and distributed a two-for-one stock split in the form of a
100% stock dividend ("Stock Split"). All the share numbers and per share amounts
set forth herein reflect the Stock Split.
The principal executive office of Century is located at 10055 Sweet Valley
Drive, Valley View, Ohio, 44125 and its telephone number is (216) 447-9000. In
March 1998, the Company's principal executive office will be relocated to 6480
Rockside Woods Blvd., South, Suite 330, Cleveland, Ohio 44131. Its telephone
number will remain the same.
BUSINESS STRATEGY
Century's business strategy is to grow aggressively by expanding its
current operations in the outsourced business services and specialty insurance
areas, having discontinued and disposed of its operations in the environmental
service area. The Company plans to implement its business strategy through
internal growth and by acquiring and integrating existing businesses that
provide outsourced business services or specialty insurance services.
The 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. Century's strategy is to acquire companies that (i)
have strong and energetic entrepreneurial leadership; (ii) have historic and
expected future internal growth; (iii) can add to the level and breadth of
services offered by Century thereby enhancing its competitive advantage over
other outsourced business services providers; (iv) have a strong income stream;
and (v) have a strong potential for cross-selling among the Company's
subsidiaries. As opportunities are identified, and tested against such criteria,
the Company may acquire outsourced business providers throughout the United
States.
The Company uses internal acquisition teams and its contacts in the
outsourced business services and specialty insurance industries to identify,
evaluate and acquire businesses in attractive markets. Acquisition candidates
are evaluated by the Company's internal acquisition teams based on a
comprehensive process which includes operational, legal and financial due
diligence reviews.
Although management believes that the Company currently has sufficient
resources, including cash on hand, cash flow from operating activities, credit
facilities and access to financial markets to fund current and planned
operations, service any outstanding debt and make certain acquisitions, there
can be no assurance that additional financing will be available on a timely
basis, if at all, or that it will be available on terms acceptable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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ACQUISITIONS
Recent Acquisitions
During 1997, the Company continued its strategic acquisition program,
purchasing the businesses of 39 complementary companies. These acquisitions
comprised the following: ten accounting systems and tax advisory businesses,
including Comprehensive, a franchisor of accounting services; eight specialty
insurance businesses; four workers' compensation administration businesses; ten
payroll administration/benefits design and administration firms; three human
resources/executive search firms; one valuation and appraisal group; two
technology firms; and one broker/dealer. The aggregate purchase price of the
aforementioned acquisitions was approximately $87.748 million, and includes
future contingent consideration of up to $5.880 million in cash and 1,716,226
shares of restricted common stock, with an estimated stock value at date of
acquisition of $17.848 million, based on the acquired companies' ability to meet
certain performance goals. The aggregate purchase price, comprised of cash
payments, issuance of promissory notes, and issuance of Common Stock, has been
allocated to the net assets of the Company based upon their respective fair
market values. See Footnote 2 to the Consolidated and Combined Financial
Statements contained herein.
DIVESTITURES
In July 1997, the Company sold the majority of its environmental services
business, and in September 1997, sold its remaining environmental operations.
Taken together, these transactions for cash and notes resulted in a net loss of
$572,000. The Company's contingent liability is limited to $1.5 million in
connection with such divestitures. Management does not believe the Company will
experience a loss in connection with such contingencies.
In December 1997, the Company sold Environmental and Commercial Insurance
Agency, Inc. and Environmental and Commercial Insurance Agency of LA, Inc. for
cash consideration resulting in a gain of approximately $171,000.
OUTSOURCED BUSINESS SERVICES
GENERAL
Through its business services subsidiaries, Century provides a wide range
of integrated business services to small and medium sized companies throughout
the United States. It is the Company's goal to be the nation's leading provider
of outsourced business services to its target market. The Company's strategies
to achieve this goal include: (i) continuing to provide clients with a broad
range of high quality products and services, (ii) continuing to expand locally
through internal growth by increasing the number of clients it serves and
increasing the number of services it provides to existing clients, and (iii)
continuing to expand nationally through an aggressive acquisition program. The
following is a description of the outsourced business services currently offered
by the Company.
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 many instances, outsourcing
administrative functions allows clients to enhance productivity, reduce costs,
and improve service, quality and efficiency. Depending on a client's size and
capabilities, it may choose to utilize all or a
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portion of the Company's broad array of services, which it typically accesses
through a single Company representative.
ACCOUNTING SYSTEMS, ADVISORY AND TAX SERVICES. The Company offers tax
planning and preparation, cash flow management, strategic planning, consulting
services for outsourced departments, and recordkeeping assistance. In addition
to federal, state and local tax return preparation, the Company provides tax
projections based on financial and investment alternatives and assists in
appropriate tax structuring of business transactions such as mergers and
acquisitions. The Company offers quarterly and year-end payroll tax reporting,
corporate, partnership and fiduciary tax planning and return preparation. In
addition, the Company offers small and medium sized businesses the opportunity
to outsource their back-office functions. The Company also offers financial
planning services to individuals, including investment counseling, personal
financial statements, mortgage and investment analysis, succession planning,
retirement planning and estate planning. In addition, the Company offers
profitability, operational and efficiency enhancement consulting to a number of
specialized industries.
EMPLOYEE BENEFITS DESIGN AND ADMINISTRATION. The Company offers
comprehensive employee benefits consulting services. These include the design,
implementation and administration of 401(k) plans, profit sharing plans, defined
benefit plans, money purchase plans and actuarial services. The Company also
assists in the choice of health and welfare benefits such as group health
insurance plans, dental and vision care programs, group life insurance programs,
accidental death and dismemberment or disability programs, voluntary insurance
programs, health care and dependent care spending accounts and premium
reimbursement plans. In addition, the Company offers communications services to
inform and educate employees about their benefit programs. The Company also
offers executive benefits consulting on non-qualified retirement plans and
business continuation plans. Moreover, one of the Company's subsidiaries offers
Registered Investment Advisory Services, including Investment Policy Statements
(IPS), mutual fund selection based on IPS and ongoing mutual fund monitoring.
HUMAN RESOURCES SERVICES. The Company offers executive search and
placement, outplacement, organizational and management training and development,
personnel records and employment process administration, regulatory compliance
training, employment relations audits, organizational structure and executive
compensation analyses, opinion surveys, and supervisory training. The Company
expects to provide additional services, including pre-employment screening,
specialized systems such as applicant skill evaluations, customer contact
monitoring, and employee assessment and selection. The Company can assist with
the implementation of programs to strengthen both the financial and human
resources sides of the client's business. The Company has developed detailed
personnel guides, which set forth a systematic approach to administering
personnel policies and practices, including recruiting, discipline and
termination procedures. In addition, the Company will review and revise, if
necessary, personnel policies and employee handbooks or will create customized
handbooks for its clients.
INFORMATION TECHNOLOGY CONSULTING SERVICES. The Company offers a wide
range of information technology services, from creating strategic technology
plans to developing and implementing software and hardware solutions.
Specifically, the Company provides strategic technology planning, project
management, development of Internet/Intranet applications including Internet
security, custom software development, design and implementation of both wide
access network ("WAN") and local access network ("LAN") networks, and accounting
software selection and implementation. The Company utilizes a methodology, in
which business needs drive technology, ensuring appropriate technical solutions
for the Company's small and medium sized information technology clients.
PAYROLL SERVICES. The Company processes time and attendance data to
calculate and produce employee paychecks, direct deposits and reports for its
clients. The Company delivers the paychecks and reports to clients within 24 to
48 hours of the Company's receipt of the data electronically submitted from the
client. The Company's system is highly configurable to meet the specialized
needs of each client yet maintains the ability to provide high volume
processing. The system integrates easily with the client's general ledger, human
resources and time and attendance systems. In addition, the Company offers many
sophisticated features, including the automatic enrollment and tracking of paid
time off, proration of compensation for new hires, integrated garnishment
processing, escrow services and funds administration services. The Company
assumes responsibility for payroll and attendant recordkeeping, payroll tax
deposits, payroll tax reporting, and all federal, state, county
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and city payroll tax reports (including 941s, 940s, W-2s, W-3s, W-4s and W-5s),
state unemployment taxes, employee file maintenance, unemployment claims and
monitoring and responding to changing regulatory requirements. The Company will
also represent the client before tax authorities in any payroll tax dispute or
inquiry.
SPECIALTY INSURANCE SERVICES. See the description in "Specialty Insurance
Services".
VALUATION SERVICES. The Company offers appraisal and valuations of
commercial tangible and intangible assets and valuation of financial securities.
The Company conducts real estate valuations for financing feasibility studies,
marketability and market value studies and performs business enterprise and
capital stock valuations for mergers and acquisitions, estate planning, employee
stock ownership trusts, sale, purchase or litigation purposes. The Company
assists in asset allocation issues, fixed asset insurance matters, fixed asset
tracking, specialized valuation consulting, investment transfer planning and
other valuation services.
WORKERS' COMPENSATION SERVICES. Each state requires employers to provide
workers' compensation coverage for employees. The Company's services vary from
state to state; however, it generally provides employers with an integrated
system of actuarial analysis and underwriting capabilities with claims
administration and has the capability to market workers' compensation products
in three states. Professional administration can offer clients sizable savings
by controlling the costs of premiums, claims and risks. Services include:
deductible programs available to further reduce costs, claims preparation and
filing, expert claims management and loss control, medical referral network for
employees, multi-state coverages, Occupational Safety and Health Administration
("OSHA") compliance and record keeping, OSHA 200 logs preparation, certificates
of insurance, loss prevention strategies, free fraud investigation, safety
program development consultation, workers' compensation audits and
classification analysis for compliance.
SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
The Company's key competitive factors in obtaining clients for business
services are a strong existing sales network and marketing program, established
relationships and the ability to match client requirements with available
services and products at competitive prices. The Company believes that by
retaining the identity of its acquired companies, it will be able to maximize
its market penetration by combining a local entrepreneurial brand name with the
name and resources of a national company. The Company expects that as it expands
through internal growth and acquisitions, it will be able to take advantage of
economies of scale in purchasing a range of services and products and to
cross-market new products and services to existing clients who do not currently
utilize all of the services the Company offers. The Company provides its
services and products through a network of 82 Company offices in 26 states, as
well as through its subsidiary Comprehensive, a franchisor of accounting
services with approximately 250 franchisee offices located in 40 states.
In addition to the Company's traditional operations, the Company intends to
utilize its Comprehensive network of approximately 250 entrepreneurial
franchisee sales offices to distribute its services and products to the
Comprehensive network's approximately 24,000 customers just as it utilizes its
own offices. The franchisees are able to market to their customers the broad
array of services and products offered by Century. In the process, the
franchisees have the opportunity to enhance customer loyalty, receive
compensation for additional sales and provide additional revenue to both the
Century subsidiary providing the service or product and to Comprehensive as the
franchisor.
None of the Company's major business services groups have a single
homogeneous client base. Rather, the Company'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 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 any 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 acquisition candidates from these
companies, many of who have acquired a number of various types of business
service providers in recent years.
The Company believes that it will be able to compete effectively based on
its (i) broad range of high quality services and products, (ii) knowledgeable
and trained personnel, (iii) entrepreneurial culture, (iv) large number of
locations, (v) diversity of geographic coverage, (vi) operational economies of
scale and (vii) decentralized operating structure.
The Company's competitors in the business outsourcing services industry
include independent consulting services companies, divisions of diversified
enterprises and banks.
REGULATION
The Company's outsourced business services are vulnerable to legislative
law changes with respect to the provision of payroll, employee benefits and
pension plan administration, tax accounting and workers' compensation design and
administration services. Legislative changes may expand or contract the types
and amounts of business services that are required by individuals and
businesses. There can be no assurance that future laws will provide the same or
similar opportunities to provide business consulting and management services to
individuals and businesses that are provided today by existing laws.
SPECIALTY INSURANCE SERVICES
GENERAL
Through its insurance subsidiaries, Century provides specialty insurance,
bonding services and workers' compensation coverage to small and medium sized
companies throughout the United States. The following is a description of the
specialty insurance, bonding services and workers' compensation programs
currently offered by Century.
OPERATIONS
The products provided by Century's insurance subsidiaries can be divided
into three categories of specialty insurance services: commercial liability
lines, which constitute approximately 84.0% of the Company's specialty insurance
business; surety bonds, which constitute 13.5%; and workers' compensation
coverage, which constitutes 2.5% of the Company's specialty insurance business.
In addition, Century employs reinsurance to limit its exposure on policies and
bonds.
COMMERCIAL LINES. Century's commercial product lines operations consist of
approximately 40 different programs for a wide variety of specialty risk groups.
Largest among these are general liability insurance and related coverages for
(i) small construction contractors; (ii) restaurants, bars, and taverns; (iii)
small commercial and retail establishments; and (iv) sun tanning salons.
Century's commercial lines business is produced by a network of
approximately 72 agents (with 104 offices) and 28 brokers (with 28 offices).
Subject to strict and detailed written underwriting guidelines regarding pricing
and coverage limitations published by Century, agents have limited authority to
bind coverage. For casualty coverage, agents may bind and write up to $1.0
million combined single limit of liability for risks other than those on the
list of prohibited classes or on the list for referral to Century. Policies that
are bound by agents are immediately forwarded to Century for review and
inspection, and Century reserves the right to make the final underwriting
decision based on its acceptance or rejection of individual risks. Risks outside
the written guidelines must be submitted to Century for specific approval for
underwriting. Brokers have no underwriting authority and must submit all risks
to Century for underwriting, quoting, binding and policy insurance.
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Century checks premium ratings on a selective basis to verify that program
rules and rates are being followed. In addition, underwriters perform monthly
reviews of files for renewal risks. Files are reviewed on a selective basis by
policy type, particular risk class, or individual general agent as loss
experience or changing underwriting practices dictate. In addition to other
underwriting quality control measures, a continuous audit process 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.
All claims against commercial policies are managed by Century's claim
departments. Outside adjusters and attorneys are engaged, as necessary, to
supplement the Company's in-house staff and to represent the Company in
litigation over disputed claims. Claims guidelines are in place on all programs.
State regulations and data on unfair claims practices are also provided to the
staff members as necessary and appropriate. Century's philosophy is to pay valid
claims as expeditiously as possible but to resist firmly what management
believes are unjust and fraudulent claims. In an effort to provide adequate
resources to the claims staff, CSC became a member of the Property Loss Research
Bureau and the Liability Insurance Research Bureau in 1995. Century also submits
claim data to the index bureaus of the American Services Insurance Group and the
Property Insurance Loss Register.
It is the responsibility of the claims manager to appoint outside adjusting
firms to work on behalf of the Company. These firms, however, are given no
authority to settle any claims without Century's prior agreement. The internal
adjuster assigned to each individual claim determines, after coverage is
analyzed, whether the claim can be handled in house or should be assigned to an
outside firm.
SURETY BONDING. Century's surety bonding operations consist of two major
programs: contract surety bonds for construction contractors (with work programs
typically ranging from $250,000 to $10.0 million per year) and bonds for the
solid waste industry, including waste haulers and landfill operators. The
Company also writes a small number of bail bonds.
Contract surety consists of bonds that government authorities and some
private entities require construction contractors to post to provide assurance
that contract work will be performed timely, to specification, on budget, and
without encumbrance from suppliers or subcontractors who may have lien rights
for non-payment. Contract surety business is underwritten by Century subject to
authority defined in agency agreements with the insurance companies. The
business is produced by approximately 100 appointed agents, who have limited
authority to bind Century's insurance subsidiaries in accordance with specific
guidelines established by Century. Because the contract surety business is
specialized in smaller, newer and more difficult accounts, underwriters take
collateral, require contract funds control, and take other risk control measures
considered extraordinary by standard market sureties. In virtually all cases,
bond principals indemnify the surety against loss with their personal as well as
corporate assets.
Once bonds are issued, the Company continues to review all projects to
determine job progress, bill payment, and other factors. Century maintains
real-time records of all bonded exposures, amended as appropriate, in an effort
to obtain the most current possible assessment of exposures for each account and
to avoid excessive exposure on any one account. Century also strives through its
review procedures to provide Century's insurance subsidiaries with the earliest
possible notice of potential difficulty so that claim resources can be brought
to bear at the earliest possible stage in an effort to mitigate losses.
While claims against surety bonds are managed by the Company, outside
counsel are engaged to handle surety defense litigation. In addition, Century
has or has access to completion capability for finishing bonded
work which bonded principals are unable to complete, and pursues recoveries on
behalf of Century's insurance subsidiaries from principals who have defaulted on
bond obligations. Such recovery efforts range from execution on collateral
posted by bonded principals to indemnity litigation to recover surety losses
from indemnitors' business and personal assets.
The Company's solid waste bond program, which is national in scope, is
primarily written directly by Century, and serves bond accounts that are
generally much larger than those handled by Century's contract surety program.
The primary focus of this program is bonds for landfill closure and post-closure
care required by states
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in accordance with Subtitle D of the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"). These bonds are designed to assure that non-hazardous
solid waste landfills will be closed when their useable airspace is exhausted in
accordance with RCRA closure requirements (or such higher standards as
individual states may impose) and that the sites will be maintained in
accordance with RCRA standards for a period of at least 30 years after closure.
Management believes that this program is one of only a few landfill bond
programs in the United States, although bank letters of credit and other devices
may be used to satisfy RCRA financial assurance requirements. See "--
Regulation." The Company currently writes landfill bonds for some of the larger
solid waste disposal firms in the country. As a companion to the landfill
closure bonds, Century also writes bonds required of waste haulers to assure the
observance of terms of their contracts with the local communities from which
they collect waste.
To stay abreast of technical and market developments in the surety
industry, certain of Century's subsidiaries are members of the Surety
Association of America, the National Association of Independent Sureties,
National Association of Surety Bond Producers, the Surety Federation of Ohio,
and the American Surety Association, on which Board of Directors CSC occupies a
position.
WORKERS' COMPENSATION SERVICES. Each state requires employers to provide
workers' compensation coverage for employees. The Company's workers'
compensation program includes fully issued workers' compensation coverage as
well as other services. The Company's services vary from state to state;
however, it generally provides employers with an integrated system of actuarial
analysis and underwriting capabilities with claims administration. Century has
the capability to market workers' compensation products in three states.
Professional administration can offer clients sizable savings by controlling the
costs of premiums, claims and risks. Services include: deductible programs
available to further reduce costs, claims preparation and filing, expert claims
management and loss control, medical referral network for employees, multi-state
coverages, OSHA compliance and record keeping, OSHA 200 logs preparation,
certificates of insurance, loss prevention strategies, free fraud investigation,
safety program development consultation, workers' compensation audits and
classification analysis for compliance.
REINSURANCE. Century employs reinsurance to limit its exposure on the
policies and bonds it has written. The Company utilizes several different
reinsurance programs to cover its exposure, including "treaties" that cover all
business in a defined class and "facultative" reinsurance that covers individual
risks. The Company generally retains from $50,000 to $200,000 of each commercial
line anticipated risk, depending on the program. Surety retentions may go as
high as $1.0 million or more, but typically are less than $250,000.
Numerous domestic and international reinsurers support these various
programs in different combinations. Generally, the Company's reinsurers are
rated A- or better by A.M. Best, a leading rating agency of insurance companies
and reinsurers, and demonstrate capital and surplus in excess of $80.0 million
(collectively in excess of $10.0 billion). Cessions are diversified so that
every reinsurance treaty (i.e., excluding facultative arrangements) is supported
by more than one reinsurer and no reinsurer is participating in all of Century's
reinsurance programs.
MARKETING
Other than the workers' compensation program, Century's insurance and
bonding business is focused on niche insurance and surety coverages known in the
insurance business as "non-standard" or specialty coverages. These terms refer
to risks regarded as higher than standard or normal risks and to risk groups
regarded as too small or too specialized to permit profitable underwriting by
larger, "standard market" insurance companies. In general, non-standard
insurance and bonds are more expensive, and coverage more limited, because of
perceived additional risk associated with this type of business. Century
attempts to identify and exploit such niches in the non-standard insurance
market where management believes the actual risk is significantly less than the
perceived risk at which the coverage is defined and priced, or where the Company
(because of its smaller size and lower overhead) is able to underwrite coverages
more economically than larger carriers.
Many non-standard insurance products can be marketed on an excess and
surplus lines basis, which means that the carrier is not fully admitted in a
given state but instead satisfies a less restrictive threshold of regulatory
scrutiny, known as "eligibility," to write excess and surplus lines ("E&S"). E&S
eligibility offers much more
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flexibility than admitted carriers enjoy. For example, E&S eligibility offers
certain marketing advantages, principally exemption from rate and form filing
requirements that apply to admitted carriers, which permits E&S carriers to
adjust prices and coverages more quickly than admitted carriers, or to cease
writing altogether. Accordingly, the majority of the non-surety business of the
Company is written on an E&S basis. Through certain of its subsidiaries, Century
is admitted in 36 states, but is eligible to write on an E&S basis in 40 states
plus the District of Columbia, the most significant of such states being
California, Texas and Florida.
Where competitive or regulatory requirements necessitate the use of
admitted carriers, Century uses its admitted subsidiaries, thereby reaching a
market of 36 states. Management believes that this strategy of employing both
admitted and non-admitted E&S carriers helps to maximize the Company's
flexibility within the insurance regulatory environment in an effort to market a
broad range of products on a profitable basis. Century also employs reinsurance
arrangements to market certain products in all 50 states.
POTENTIAL COMPETITION
Both the commercial lines and the surety industries have been highly
competitive in recent years, resulting in the consolidation of some of the
industries' largest companies. Competition is particularly acute for smaller,
specialty carriers like Century because the market niches exploited by Century
are small and can be penetrated by a large carrier that elects to cut prices or
expand coverage. The Company has endured this risk historically by maintaining a
high level of development of new products, eschewed by most major carriers.
CUSTOMERS
Century provides specialty insurance services to approximately 6,000
clients through a network of nearly 200 agents. The Company attempts to maintain
diversity within its client base to lower its exposure to downturns or
volatility in any particular industry and help insulate the Company to some
extent from general economic cyclicality. All prospective customers are
evaluated individually on the basis of insurability, financial stability and
operating history. No customer individually comprises more than 3.0% of the
total consolidated revenue of the Company.
REGULATION
FEDERAL REGULATION. Century's specialty insurance operations are
vulnerable to both judicial and legislative law changes. Judicial expansion of
terms of coverage can increase risk coverage beyond levels contemplated in the
underwriting and pricing process.
At the same time, coverages that are established by statute may be
adversely affected by legislative or administrative changes of law. Most surety
bonds exist because they are required by government agencies. When governments
change the threshold for requiring surety, the market for surety bonds is
directly affected.
Approval by the U.S. Department of the Treasury ("Treasury") and Treasury
listing as an approved surety is required for the Company's Surety Bond Program.
Century Surety Company and Evergreen National Indemnity Company ("Evergreen")
are currently approved and listed "Companies Holding Certificates of Authority
as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies"
by the Treasury Department Circular 570, effective July 1, 1997.
STATE REGULATION. The companies of the CSC Group are subject to regulation
and supervision by state insurance regulatory authorities, most comprehensively
for each insurance company in its state of incorporation, but also in other
states where the Companies are admitted or eligible to write E & S lines. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Sources of Cash." These regulatory bodies have broad administrative
powers relating to (i) standards of solvency, which must be met on a continuing
basis; (ii) granting and revoking of licenses; (iii) licensing of agents; (iv)
approval of policy rates and forms; (v) maintenance of adequate reserves; (vi)
form and content of financial statements; (vii) types of investments permitted;
(viii) issuance and sale of stock; and (ix) other matters pertaining to
insurance. See Footnote 9 to the Consolidated and Combined Financial Statements
contained herein.
Each of the CSC Group companies is required to file detailed annual
statements with the applicable state regulatory bodies and is subject to
periodic examination by the regulators. The most recent regulatory
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examinations for CSC and Evergreen were made as of December 31, 1993. Regulatory
review by the Ohio Department of Insurance for each of CSC and Evergreen for the
year ended December 31, 1996 is currently in progress. The most recent triennial
regulatory examination of Continental Heritage Insurance Company ("Continental
Heritage"), a subsidiary of CSC, by the Utah Department of Insurance was as of
December 31, 1994.
ENVIRONMENTAL SERVICES
GENERAL
In July, 1997, the Company sold the majority of its environmental services
operations, and in September 1997 sold its remaining environmental operations.
LIABILITY INSURANCE AND BONDING
Century carries commercial general liability insurance, automobile
liability insurance, workers' compensation, and employer's liability insurance
as required by law in the various states in which operations are conducted and
umbrella policies to provide excess limits of liability over the underlying
limits contained in the commercial general liability, automobile liability and
employer's liability policies. See "Legal Proceedings."
EMPLOYEES
At December 31, 1997, Century employed approximately 1,200 employees. The
Company considers its relationships with its employees to be good.
PROPERTIES
Century's corporate headquarters is located in Valley View, Ohio in leased
premises. The Company has completed negotiations to lease a 14,000 square foot
portion of an office building in Independence, Ohio and will relocate its
headquarters to 6480 Rockside Woods Blvd., South, Suite 330, Cleveland, Ohio
44131 during the first quarter of 1998. Certain of the property and equipment of
the Company are subject to liens securing payment of portions of the
indebtedness of the Company and its subsidiaries. The Company's subsidiaries
also lease 74 offices in 26 states and certain of their equipment. The Company
believes that its facilities are sufficient for its needs.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Company's subsidiaries are parties to legal proceedings, which have
arisen, in the ordinary course of their business. Although it is possible that
losses exceeding amounts already reserved may be incurred upon ultimate
resolution of these matters, management believes that such losses, if any, will
not have a material adverse effect on the 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
On 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 majority of the outstanding shares of the
Company's Common Stock executed a written consent approving the amendment.
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DIRECTORS AND EXECUTIVE OFFICERS OF
CENTURY BUSINESS SERVICES, INC.
The following table sets forth certain information as of December 31, 1997
regarding the directors, executive officers and certain key employees of the
Company. Each executive officer of the Company named in the following table has
been elected to serve until his successor is duly appointed or elected or until
his earlier removal or resignation from office. No arrangement or understanding
exists between any executive officer of the 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(3) 64 Chief Executive Officer, President and Chairman of
the Board
Gregory J. Skoda(3) 41 Executive Vice President and Director
Charles D. Hamm, Jr.(3) 43 Chief Financial Officer and Treasurer
Edward F. Feighan 50 Senior Vice President, Public Affairs
Douglas R. Gowland 56 Senior Vice President, Business Integration
Keith W. Reeves 40 Senior Vice President, Business Services
Craig L. Stout 49 Senior Vice President, Insurance Services
Rick L. Burdick(1) 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
Administration 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 the Company
since April 1995 and as Chief Executive Officer and President since November
1997. Mr. DeGroote also served as President and Chief Executive Officer of the
Company from April 1995 until October 1996. Mr. DeGroote served as Chairman of
the Board, President and Chief Executive Officer of Republic Industries, Inc.
("RII") from May 1991 to August 1995. Mr. DeGroote founded Laidlaw Inc., a
Canadian waste services and transportation company in 1959. In 1988, Mr.
DeGroote sold his controlling interest in Laidlaw to Canadian Pacific Limited.
Mr. DeGroote served as President and Chief Executive Officer of Laidlaw from
1959 until 1990. Mr. DeGroote also serves as a director of RII.
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GREGORY J. SKODA has served as the Executive Vice President and a Director
of the Company since November 1997, the Chief Financial Officer and Treasurer of
the Company from November 1996 until November 1997, and as a director and an
officer of a number of the Company's subsidiaries. Prior to the Company's
acquisition of SMR & Co. Business Services ("SMR") in December 1996, Mr. Skoda
served as President and Chairman of SMR, which he founded in 1980. Mr. Skoda is
a CPA and an active member of the American Institute of Certified Public
Accountants in the Tax, Employee Benefits, and Management Advisory Services
divisions.
CHARLES D. HAMM, JR. has served as Chief Financial Officer and Treasurer
since November 1997. Mr. Hamm was associated with KPMG Peat Marwick LLP from
June 1984 until November 1997, serving as a partner of such firm from July 1996
until November 1997. Mr. Hamm is a CPA and a member of the American Institute of
Certified Public Accountants and the Ohio Society of Certified Public
Accountants.
EDWARD F. FEIGHAN has served as Senior Vice President, Public Affairs of
the Company since November 1997. Mr. Feighan served as Chief Executive Officer,
President and a Director of the Company from October 1996 through November 1997.
Mr. Feighan also serves as a director and an officer of a number of the
Company's subsidiaries. From 1983 until 1993, Mr. Feighan served as the
representative from the Ohio 19th Congressional District of the United States
House of Representatives. During his tenure in Congress, Congressman Feighan
served on the Judiciary and the House Foreign Affairs Committee; Chairman,
International Narcotics Control Committee; President, The Interparliamentary
Union; and permanent Representative to the Helsinki Commission. He currently
serves on the board of trustees of the National Democratic Institute for
International Affairs, and the Rock and Roll Hall of Fame and Museum.
DOUGLAS R. GOWLAND has served as Senior Vice President, Business
Integration since November 1997. Mr. Gowland served as a Director of the Company
from April 1995 through November 1997. From April 1995 until October 1996, Mr.
Gowland served as the Company's Executive Vice President and Chief Operating
Officer. From January 1992 to April 1995, Mr. Gowland served as Vice
President -- Hazardous Waste Operations of RII. From March 1991 to January 1992,
Mr. 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 Senior Vice President, Business Services
since March 1997 and as a director and an officer of a number of the Company's
subsidiaries. Mr. Reeves has also served as the President of SMR since December
1996. Mr. Reeves served as Vice President of SMR from August 1984 until its
acquisition by the Company in December 1996. Mr. Reeves is a CPA and a member of
the American Institute of Certified Public Accountants and the Ohio Society of
Certified Public Accountants.
CRAIG L. STOUT has served as Senior Vice President, Insurance Services
since November 1997. Mr. Stout served as Chief Operating Officer and a Director
of the Company from October 1996 through November 1997. Mr. Stout also serves as
a director and an officer of a number of the Company's subsidiaries. Prior to
joining the Company, Mr. Stout served as Executive Vice President of Alliance
Holding Corporation which was the holding corporation of the CSC Group and CSA
and two other companies which he founded, Contract Operations Planning, Inc., a
surety claims management firm, and Contract Surety Reinsurance Corporation, a
reinsurance intermediary for facultative surety reinsurance.
RICK L. BURDICK has served as a Director of the Company since November
1997. Mr. Burdick has been a partner at the law firm of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. since April 1988. Mr. Burdick serves on the Boards of
Directors of RII and J. Ray McDermott, S.A.
JOSEPH S. DIMARTINO has served as a Director of the Company since November
1997. Mr. DiMartino has been Chairman of the Board of Dreyfus Group of Mutual
Funds since January 1995. Mr. DiMartino served as President, Chief Operating
Officer and Director of The Dreyfus Corporation from October 1982 until December
1994. Mr. DiMartino also serves on the Board of Directors of Noel Group, Inc.,
Staffing Resources, Inc., Health Plan Services Corporation, Carlyle Industries,
Inc., and the Muscular Dystrophy Association.
HARVE A. FERRILL has served as a Director of the Company since October
1996. Mr. Ferrill has served as Chief Executive Officer of Advance Ross
Corporation, a company that provides tax refunding services ("ARC"), since 1991
and as President of Ferrill-Plauche Co., Inc., a private investment company,
since 1982. Mr. Ferrill
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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, joint ventures, and real estate, on behalf of its owner, Mr. H. Wayne
Huizenga. Mr. Rochon also has served as a director since September 1996 and as
Vice Chairman of Florida Panthers Holdings, Inc., a leisure and recreation and
sports and entertainment company, since April 1997. From 1985 until 1988, Mr.
Rochon served as Treasurer of Huizenga Holdings, Inc. and from 1979 until 1985,
he was employed as a certified public accountant by the international public
accounting firm of Coopers & Lybrand, L.L.P.
OTHER KEY EMPLOYEES:
THOMAS J. BREGAR was named Vice President, Information Technology Systems
in November 1997. Mr. Bregar joined SMR in December 1996 to develop its
Information Technology Consulting Practice. Prior to joining SMR, Mr. Bregar was
with Price Waterhouse's Management Consulting Services Practice from 1986
through 1992, and again as Director from 1994 to 1996. In 1993, he served as
Vice President in the Information Management Services Division at Society
National Bank (now Keycorp Services).
DANIEL J. CLARK was named Vice President, Corporate Relations in November
1997 and is the Senior Vice President of Evergreen National Indemnity Company
("Evergreen") and a director of Century Surety Company, both subsidiaries of the
Company. Prior to joining Evergreen, Mr. Clark served as Chief of Staff for then
Congressman Edward F. Feighan from 1983 through 1993. Mr. Clark is a member of
the 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 Bar in 1961 and is an active member of the Akron, Ohio State and American
Bar Associations.
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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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is quoted on The Nasdaq National Market
under the trading symbol "CBIZ". Prior to December 23, 1997, the Common Stock
was quoted under the trading symbol "IASI". The table below sets forth the range
of high and low sales prices for the Common Stock as reported on The Nasdaq
National Market for the periods indicated. Prior to April 27, 1995, the day on
which the Common Stock of the Company was first publicly traded, there was no
public market for the Common Stock of the Company. The following prices are
adjusted for the Company's July 1996 two for one stock split.
PRICE RANGE
OF COMMON STOCK
----------------
HIGH LOW
------ -----
1995
Second Quarter (beginning April 27, 1995)................ $ 2.25 $1.25
Third Quarter............................................ 4.00 1.81
Fourth Quarter........................................... 2.31 1.56
1996
First Quarter............................................ $ 1.59 $1.25
Second Quarter........................................... 20.88 1.44
Third Quarter............................................ 18.75 4.75
Fourth Quarter........................................... 12.75 7.50
1997
First Quarter............................................ $15.13 $9.88
Second Quarter........................................... 11.50 7.88
Third Quarter............................................ 11.75 7.88
Fourth Quarter........................................... 17.25 8.75
On December 31, 1997, the last reported sale price of the Company's Common
Stock as reported on The Nasdaq National Market was $17.25 per share. As of
February 13, 1998, the Company had 6,385 holders of record of its Common Stock.
DIVIDEND POLICY
The Company's credit facility contains restrictions on the Company's
ability to pay dividends. Since April 27, 1995, the Company has not declared or
paid any cash dividends on its capital stock. The Company intends to retain its
earnings, if any, for use in its business and does not anticipate paying any
cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for Century
and are derived from the historical consolidated and combined financial
statements and notes thereto, which are included elsewhere in this Annual Report
of Century. The information set forth below should be read in conjunction with
"Management's
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Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated and combined financial statements of Century and the notes
thereto, which are included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues:
Business services fees and commissions:............ $ 63,411 $ 1,606 $ -- $ -- $ --
Specialty insurance services (regulated):
Premiums earned.................................. 37,238 27,651 26,962 23,368 17,373
Net investment income............................ 4,524 3,564 3,341 2,477 1,377
Net realized gains (losses) on investments....... 3,044 1,529 166 80 (91)
Other income..................................... 13 1,419 470 1,385 1,737
--------- --------- -------- -------- --------
Total revenues................................... $108,230 $ 35,769 $30,939 $27,310 $20,396
Expenses:
Operating expenses -- business services............ 50,277 1,107 -- -- --
Loss and loss adjustment expenses.................. 20,682 17,624 15,117 12,494 8,613
Policy acquisition expenses........................ 9,670 7,699 7,774 5,428 4,996
Corporate general and administrative expenses...... 4,578 302 -- -- --
Depreciation and amortization expenses............. 2,612 320 -- -- --
Other expenses..................................... 2,331 2,655 3,157 4,544 3,302
--------- --------- -------- -------- --------
Total expenses................................... 90,150 29,707 26,048 22,466 16,911
Income from continuing operations before net
corporate interest income and income tax expense... 18,080 6,062 4,891 4,844 3,485
Net corporate interest income........................ 965 -- -- -- --
--------- --------- -------- -------- --------
Income from continuing operations before income tax
expense............................................ 19,045 6,062 4,891 4,844 3,485
Income tax expense................................... 6,280 1,640 1,422 1,344 1,189
--------- --------- -------- -------- --------
Income from continuing operations.................... 12,765 4,422 3,469 3,500 2,296
Loss from operations of discontinued business........ 663 38 -- -- --
Loss on disposal of discontinued business............ 572 -- -- -- --
--------- --------- -------- -------- --------
Net income........................................... $ 11,530 $ 4,384 $ 3,469 $ 3,500 2,296
========= ========= ======== ======== ========
Weighted average common shares....................... 36,940 17,863 14,760 14,760 14,760
Weighted average common shares and dilutive potential
common shares...................................... 48,904 24,032 16,956 16,956 16,956
Basic earnings per share:
From continuing operations......................... $ 0.35 $ 0.25 $ 0.24 $ 0.24 $ 0.16
From discontinued operations....................... $ (0.04) $ -- $ -- $ -- $ --
Diluted earnings per share:
From continuing operations......................... $ 0.26 $ 0.18 $ 0.20 $ 0.21 $ 0.14
From discontinued operations....................... $ (0.02) $ -- $ -- $ -- $ --
Gross written premiums............................... $ 59,751 $ 42,888 $37,695 $37,869 $29,992
Net written premiums................................. $ 37,488 $ 31,149 $26,677 $27,219 $21,173
Loss ratio........................................... 34.3% 41.3% 39.2% 37.9% 38.0%
LAE ratio............................................ 21.2% 22.5% 16.9% 15.6% 11.6%
Expense ratio........................................ 32.2% 38.0% 39.9% 43.5% 39.7%
--------- --------- -------- -------- --------
Combined ratio....................................... 87.7% 101.8% 96.0% 97.0% 89.3%
========= ========= ======== ======== ========
Invested assets and cash............................. $100,868 $108,523 $60,908 $57,642 $46,670
Goodwill, net of accumulated amortization............ 89,856 6,048 -- -- --
Total assets......................................... 287,567 167,330 86,735 81,931 68,117
Loss and loss expenses payable....................... 50,655 41,099 37,002 34,661 29,528
Total liabilities.................................... 139,657 76,008 59,967 58,100 50,304
Total shareholders' equity........................... 147,910 91,322 26,768 23,580 18,401
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding of the
Company's financial position and results of operations for each of the years
ended December 31, 1997, 1996 and 1995. This discussion should be read in
conjunction with the Company's consolidated and combined financial statements
and notes thereto included herein. During fiscal 1997, the Company continued its
strategic acquisition program, purchasing the businesses of 39 complementary
companies. With one immaterial exception, each of the acquisitions was accounted
for as a purchase, and accordingly, the operating results of the acquired
companies have been included in Century's consolidated and combined financial
statements since their date of acquisition. The results of operations related to
the Company's environmental services operations have been reflected as a
discontinued operation in the consolidated and combined financial statements.
See "Results of Operations -- Discontinued Operations."
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
REVENUES
Total revenues increased to $108.2 million for the year ended December 31,
1997 from $35.8 million in 1996, representing an increase of $72.4 million, or
203%. The increase was primarily attributable to the Company's acquisition
activity in outsourced business services.
Business service fees and commissions increased to $63.4 million for the
year ended December 31, 1997 from $1.6 million in 1996, representing an increase
of $61.8 million. The increase was primarily attributable to the acquisitions
completed in 1997. Due to the majority of recent acquisitions having been
accounted for under the purchase method, the Company's consolidated financial
statements give effect to such acquisitions only from their respective
acquisition dates.
Premiums earned increased to $37.2 million for the year ended December 31,
1997 from $27.7 million in 1996, representing an increase of $9.5 million, or
34.7%. Gross written premiums increased to $59.8 million for the year ended
December 31, 1997 from $42.9 million in 1996, representing an increase of $16.9
million, or 39.3%. Net written premiums increased to $37.5 million for the year
ended December 31, 1997 compared to $31.1 million in 1996, representing an
increase of $6.4 million, or 20.4%. These increases were primarily attributable
to the growth in commercial liability premiums over 1996 levels, the
introduction of workers compensation coverage emanating from an August 1997
business transaction and the assumption of contract surety premiums under a
certain reinsurance agreement entered into in 1997.
Net investment income increased to $4.5 million for the year ended December
31, 1997 from $3.6 million in 1996, representing an increase of $960,000, or
26.9%. This increase was attributable to an increase in the annualized return on
investments to approximately 5.7% for the year ended December 31, 1997 from 5.3%
in 1996 and to an increase in the average investments outstanding to $74.2
million for the year ended December 31, 1997 from $64 million in 1996.
Net realized gain on investments increased to $3.0 million for the year
ended December 31, 1997 from $1.5 million in 1996. This increase was primarily
due to increased sales of equity securities.
Other income decreased to $13,000 for the year ended December 31, 1997 from
$1.4 million for the comparable period in 1996, representing a decrease of $1.4
million. The decrease was primarily attributable to non-recurring income from
the American Sentinel settlement.
EXPENSES
Total expenses increased to $90.2 million for the year ended December 31,
1997 from $29.7 million in 1996, representing an increase of $60.5 million. Such
increase was primarily attributable to the increase in operating expenses, which
reflects the impact of the Company's acquisitions made in 1997 and the
corresponding increase
19
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of corporate staff and related integration costs. As a percentage of revenues,
total expenses increased to 83.3% for the year ended December 31, 1997 from
83.1% in 1996.
Operating expenses for the business services operations increased to $50.3
million for the year ended December 31, 1997 from $1.1 million in 1996,
representing an increase of $49.2 million. Such increase was attributable to
business services acquisitions completed in 1997. As a percentage of fees and
commissions, operating expenses increased to 79.3% for the year ended December
31, 1997 from 68.9% in 1996.
Loss and loss adjustment expenses increased to $20.7 million for the year
ended December 31, 1997 from $17.6 million in 1996, representing an increase of
$3.1 million, or 17.4%. Such increase was attributable to the increased premium
volume for liability coverages. As a percentage of premiums earned, loss and
loss adjustment expenses decreased to 55.5% for the year ended December 31, 1997
from 63.7% in 1996. Such decrease was the result of claims from prior years that
were settled and paid in 1996 for higher than reserved amounts.
Policy acquisition expenses increased to $9.7 million for the year ended
December 31, 1997 from $7.7 million in 1996, representing an increase of $2.0
million, or 25.6%. The increase corresponds directly to the increase in premium
volume. As a percentage of net written premiums, policy acquisition expenses
were 25.8% and 24.7% for the year ended December 31, 1997 and 1996,
respectively.
Corporate general and administrative expenses increased to $4.6 million for
the year ended December 31, 1997 from $302,000 in 1996. Such increase was
attributable to the creation of a corporate function in the fourth quarter of
1996 that did not exist prior to the reverse merger. Corporate general and
administrative expenses represented 4.2% of total revenues for the year ended
December 31, 1997.
Depreciation and amortization expense increased to $2.6 million for the
year ended December 31, 1997 from $320,000 in 1996, representing an increase of
$2.3 million. The increase is a result of the increase of goodwill amortization
resulting from the acquisitions completed by the Company in 1997. As a
percentage of total revenues, depreciation and amortization expense increased to
2.4% for the year ended December 31, 1997 from 0.8% in 1996. Such increase was
attributable to the implementation of the Company's acquisition strategy.
Other expenses decreased to $2.3 million for the year ended December 31,
1997 from $2.7 million in 1996, representing a decrease of approximately
$400,000. Such decrease was primarily attributable to the return of certain
ceding commissions, which are calculated based on historical experience in
relation to certain reinsurance contracts. The inclusion of the return of ceding
commissions as an other expense item conforms to insurance industry standards.
As a percentage of net written premiums, other expenses decreased to 6.2% for
the year ended December 31, 1997 from 8.5% in 1996. Such decrease reflects the
positive impact of the ceding commissions.
NET CORPORATE INTEREST INCOME
Net Corporate interest income increased to $965,000 for the year ended
December 31, 1997 from zero in 1996. Such increase was attributable to the
increase in cash and cash equivalent balances for the Company, excluding
specialty insurance and outsourced business services.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Total revenues increased $4.9 million, or 16%, from $30.9 million in 1995
to $35.8 million in 1996. Premiums earned increased approximately $700,000 on an
increase of $4.5 million in net written premiums in 1996. Much of the increase
in net written premiums was recorded in the second half of 1996, which directly
impacted Century's earned premium. On a gross written basis, Century reported an
increase of $5.2 million in 1996, $5.0 million of which was generated through
brokerages and $800,000 of which was generated through general agencies. These
increases were offset by a $1.3 million decline in Century's remedial action
coverages.
Century reported increases in net investment income of $223,000 and net
realized gains on investments of $1.4 million in 1996. Net investment income
grew 6.7% on invested assets of $68.6 million in 1996. Century's $1.4 million
increase in net realized gains on investments from $166,000 in 1995 to $1.5
million in 1996 is attributable to the gains realized on the sale of certain
equity investments.
20
21
Other income increased $949,000 in 1996 over 1995 and is attributable to
non-recurring income of $1.1 million from the American Sentinel settlement,
higher commission income of $400,000 and SMR revenues of $600,000 since its
acquisition.
Total expenses increased $3.7 million to $29.7 million in 1996 from $26.0
million in 1995. Such increase was primarily attributable to an increase in loss
and loss adjustment expenses ("LAE") of $2.5 million, and an increase in
operating expenses of $1.1 million, which reflects the impact of the Company's
acquisitions made in 1996. While losses incurred have increased $844,000, loss
development from prior years increased $1.4 million and primarily relate to
property losses, which were higher than normal. In addition, Century has
experienced increases in LAE to $6.2 million in 1996 from $4.5 million in 1995.
Such increases are attributable to Century's business mix, primarily its
casualty lines of business, and to the general litigation climate. The casualty
lines of business generally have higher loss adjustment costs relative to
premium dollars. Another factor affecting this increase is the court ruling in
the case of Montrose Chemical Corporation v. Admiral Insurance Company. The
California Supreme Court adopted a "continuous trigger of coverage" in cases
involving continuous and progressive third party damage claims. Insurance
companies are liable for claims occurring prior to the policy period for claims
which continued to progress during the course of the policy term. The exposure
to Century does not have a residual impact on loss reserves but does have a
direct effect on the Company's loss adjustment reserving practices due to a
higher potential for claims handling and litigation costs.
Income from continuing operations before taxes increased $1.2 million, or
23.9%, to $6.1 million in 1996 from $4.9 million in 1995 and net income
increased $915,000, to $4.4 million in 1996 from $3.5 million in 1995 primarily
for the reasons stated above.
COMBINED AND OPERATING RATIOS
The combined ratio is the sum of the loss ratio and expense ratio and is
the traditional measure of underwriting performance for insurance companies. The
operating ratio is the combined ratio less the net investment income ratio (net
investment income to net earned premium) excluding realized and unrealized
capital gains and is used to measure overall company performance.
The following table reflects the loss, LAE, expense, combined, net
investment and operation ratios of Century on a generally accepted accounting
principles ("GAAP") basis for each of the years ended December 31, 1997, 1996
and 1995:
YEAR ENDED DECEMBER
31,
---------------------
1997 1996 1995
---- ----- ----
Loss ratio............................................... 34.3 41.3 39.2
LAE ratio................................................ 21.2 22.5 16.9
Expense ratio............................................ 32.2 38.0 39.9
Combined ratio........................................... 87.7 101.8 96.0
Net investment ratio..................................... 12.2 12.9 12.4
Operating ratio.......................................... 75.5 88.9 83.6
Expenses
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net earned premiums on a GAAP basis. Expense ratios have been
favorably impacted by reinsurance contingencies.
Liability for Losses and Loss Expenses Payable
As of December 31, 1997, the liability for losses and LAE constituted 36.3%
of Century's consolidated liabilities. Century has established reserves that
reflect its estimates of the total losses and LAE it will ultimately be required
to pay under insurance and reinsurance policies. Such reserves include losses
that have been reported but not settled and losses that have been incurred but
not reported ("IBNR"). Loss reserves are established on an undiscounted basis
after reductions for deductibles and estimates of salvage subrogation.
21
22
For reported losses, Century establishes reserves on a "case" basis within
the parameters of coverage provided in the related policy. For IBNR losses,
Century estimates reserves using established actuarial methods. Case and IBNR
loss reserve estimates reflect such variables as past loss experience, social
trends in damage awards, changes in judicial interpretation of legal liability
and policy coverages, and inflation. Century takes into account not only
monetary increases in the cost of what is insured, but also changes in societal
factors that influence jury verdicts and case law and, in turn, claim costs.
Century's loss reserves have been certified in accordance with the requirements
of the National Association of Insurance Commissioners.
The consolidated and combined financial statements of Century include the
estimated liability for unpaid losses and LAE of Century's insurance operations.
Reserves for unpaid losses covered by insurance policies and bonds consist of
reported losses and IBNR losses. These reserves are determined by claims
personnel and the use of actuarial and statistical procedures and they represent
undiscounted estimates of the ultimate cost of all unpaid losses and LAE through
year end. Although management uses many resources to calculate reserves, a
degree of uncertainty is inherent in all such estimates. Therefore, no precise
method for determining ultimate losses and LAE exist. These estimates are
subject to the effect of future claims settlement trends and are continually
reviewed and adjusted (if necessary) as experience develops and new information
becomes known. Any such adjustments are reflected in current operations. See
Footnote 6 to the Consolidated and Combined Financial Statements contained
herein for the activity in the liability for unpaid losses and loss expenses for
the years ended December 31, 1997, 1996, and 1995.
ANALYSIS OF LOSS AND LAE DEVELOPMENT
The historical pattern of redundancy might not be indicative of experience
which may emerge in the future.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Net liability for
losses and loss
expenses........... $3,484 $7,202 $8,168 $10,428 $12,775 $14,107 $21,023 $25,278 $28,088 $32,985 $42,399
Cumulative amount of
net liability paid
through:
One year later... 1,566 2,985 2,404 2,404 2,811 3,026 4,131 6,309 8,785 8,773 --
Two years
later......... 2,172 3,876 3,433 4,090 4,894 3,848 7,503 11,161 14,478
Three years
later......... 2,623 4,398 4,322 5,239 5,372 4,786 9,346 13,936
Four years
later......... 2,759 4,799 4,984 5,184 6,010 5,119 10,620
Five years
later......... 2,907 5,140 4,880 5,352 6,102 5,550
Six years
later......... 2,927 5,147 4,953 5,352 6,192
Seven years
later......... 2,935 5,152 4,947 5,366
Eight years
later......... 2,935 5,135 4,944
Nine years
later......... 2,917 5,128
Ten years
later......... 2,909
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YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(in thousands)
The retroactively
reestimated net
liability for loss
and loss expenses
as of:
One year later... 4,277 7,406 8,388 10,674 12,003 12,587 18,910 23,049 28,246 31,829 --
Two years
later......... 4,032 7,445 8,504 9,239 10,877 9,829 17,531 22,193 27,059
Three years
later......... 4,042 7,419 7,025 8,183 8,419 8,899 16,174 20,686
Four years
later......... 4,028 6,365 6,668 6,631 8,675 7,822 14,801
Five years
later......... 3,420 6,311 5,638 6,320 7,467 6,744
Six years
later......... 3,406 5,534 5,243 5,823 6,679
Seven years
later......... 3,009 5,308 5,133 5,532
Eight years
later......... 2,949 5,230 4,967
Nine years
later......... 2,926 5,138
Ten years
later......... 2,915
------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Net cumulative
redundancy......... $ 569 $2,064 $3,201 $ 4,896 $ 6,096 $ 7,363 $ 6,222 $ 4,592 $ 1,029 $ 1,156 $ --
======= ======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Gross
liability -- end of
year............... $34,661 $37,002 $41,099 $50,655
Reinsurance
recoverable........ 9,383 8,914 8,114 8,256
-------- -------- -------- --------
Net liability -- end
of year............ $25,278 $28,088 $32,985 $42,399
======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Century had cash and investments, excluding mortgage loans, of $99.0
million, $104.8 million, and $57.5 million at December 31, 1997, 1996 and 1995,
respectively. The $47.3 million increase from 1995 to 1996 is a result of
Century's generation of proceeds from stock issuances from exercises of
outstanding options and warrants and the Private Placement (defined herein),
profits and additional loss reserves on an increasing volume of liability
coverages which have slower payout patterns than property coverages.
Net cash provided by operating activities for the years ended December 31,
1997, 1996, and 1995 was $4.7 million, $13.2 million, and $3.6 million,
respectively. These amounts were adequate to meet the majority of Century's
capital expenditure, operating and acquisition costs and resulted primarily from
earnings and the timing of reinsurance contingency transactions.
Net cash provided by (used in) financing activities for the years ended
December 31, 1997, 1996, and 1995 was $15.6 million, $35.7 million, and $(5.6)
million, respectively. During 1996, Century realized approximately $38.2 million
in cash proceeds from a private placement and from stock issuances, offset in
part by dividends paid to Alliance Holding by CSC and CSU prior to the Merger
Transactions.
Sources of Cash
The Company's principal source of revenue from its business outsourcing
services operation is the collection of fees from professional services rendered
to its clients in the areas of information technology consulting, tax return
preparation and compliance, and business valuations, as well as other areas that
have been previously discussed.
Century's principal source of revenue from its specialty insurance services
operations consists of insurance and reinsurance premiums, investment income,
commission and fee income, and proceeds from sales and maturities of investment
securities. Premiums written become premiums earned for financial statement
purposes as the premium is earned incrementally over the term of each insurance
policy and after deducting the amount of premium ceded to reinsurers pursuant to
reinsurance treaties or agreements. The property and liability operation
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of Century generates positive cash flow from operations as a result of premiums
being received in advance of the time when the claim payments are made.
The companies of the CSC Group are subject to regulation and supervision by
state insurance regulatory agencies, applicable generally to each insurance
company in its state of incorporation. Such regulations limit the amount of
dividends or distributions by an insurance company to its shareholders. If
insurance regulators determine that payment of a dividend or any other payment
to an affiliate (such as a payment under a tax allocation agreement) would,
because of the financial condition of the paying insurance company or otherwise,
be detrimental to such insurance company's policyholders or creditors, the
regulators may block payment of such dividend or such other payment to the
affiliates that would otherwise be permitted without prior approval.
Ohio law limits the payment of dividends to Century. The maximum dividend
that may be paid without prior approval of the Director of Insurance of the
State of Ohio is limited to the greater of the statutory net income of the
preceding calendar year or 10% of total statutory shareholder's equity as of the
prior December 31.
The Company has a $50 million revolving credit facility with Bank of
America, National Trust & Savings Association ("Bank of America"), as Agent. At
December 31, 1997, approximately $8 million was outstanding under such credit
facility. The interest rate under the credit facility is, at the Company's
option, either: (a) the higher of (i) 0.50% per annum above the latest Federal
Funds Rate or (ii) the rate of interest in effect from time to time announced by
the Bank of America, San Francisco, California office as its "reference rate,"
or (b) a floating rate based on certain offshore dollar interbank market rates.
The credit facility requires the Company to comply with various affirmative and
negative covenants, including (a) observance of various financial and other
covenants, (b) restrictions on additional indebtedness, (c) restrictions on
dividend payments and (d) restrictions on certain liens, mergers, dispositions
of assets and investments. The Company must also maintain a net worth equal to
the sum of (a) $88 million plus (b) 70% of subsequent net income plus (c) the
proceeds of any equity security offerings.
In December 1996, Century issued and sold 3,251,888 units of Century (the
"Units") for $9.00 per Unit (the "Private Placement"). Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common Stock
of Century at an exercise price of $11.00 per share exercisable, in whole or in
part, for a three year period from the date of issuance. The Private Placement
resulted in net proceeds of approximately $27.7 million, after deducting the
placement agent fee and other estimated expenses associated with the Private
Placement.
In addition, Westbury (Bermuda) Ltd. formerly known as MGD Holdings
("Westbury"); the Harve A. Ferrill Trust U/A 12/31/69 (the "Ferrill Trust"); and
WeeZor I Limited Partnership ("WeeZor"), affiliates of each of Messrs. Michael
G. DeGroote, Chairman of the Board of Century; Harve A. Ferrill and Richard C.
Rochon, directors of Century, respectively, purchased an aggregate of 616,611
Units. Upon issuance of the second tranche of the Units, Century received an
additional $5.3 million in proceeds.
On February 6, 1998, the Company accepted subscriptions for 5,000,000
shares of the Company's Common Stock, consisting of 3,800,000 newly-issued
shares and 1,200,000 shares of outstanding Common Stock offered by certain
selling shareholders. The Company received proceeds of approximately $41 million
for the newly issued shares. Such proceeds will be used for general corporate
purposes, including acquisitions. Additionally, the selling shareholders either
exercised or 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.
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USES OF CASH AND LIQUIDITY OUTLOOK
OPERATIONS. Century made capital expenditures of $2,284,000, $286,000 and
$223,000 for the years ended December 31, 1997, 1996 and 1995, respectively,
which included expenditures for fixed assets for normal replacement, compliance
with regulations and market development. During the year ended December 31,
1997, Century funded capital expenditures from cash on hand and operating cash
flow. Century anticipates that during 1998, it will continue to fund
expenditures from operating cash flow supplemented by borrowing under its
revolving credit facility, as necessary. Management believes that Century
currently has sufficient cash and lines of credit to fund current operations and
expansion thereof.
Cash used in investing activities for the years ended December 31, 1997,
1996 and 1995 primarily came as the result of differences in the purchases and
sales of investments and the effect of certain business acquisitions.
Century is required to establish a reserve for unearned premiums. Century's
principal costs and factors in determining the level of profit are the
difference between premiums earned and losses, LAE and agent commissions. Loss
and LAE reserves are estimates of what an insurer expects to pay on behalf of
claimants. Century is required to maintain reserves for payment of estimated
losses and LAE for both reported claims and for IBNR claims. Although the
ultimate liability incurred by Century may be different from current reserve
estimates, management believes that the reserves are adequate.
Century believes its cash flow from operations and available financial
resources provide for adequate liquidity to fund existing and anticipated
capital and operational requirements as well as to fund future growth and
expansion. Management is not aware of any current recommendations by regulatory
authorities that, if implemented, could have a material impact on Century's
liquidity, capital resources and operations.
YEAR 2000. The Company's business depends in part upon its ability to
store, retrieve, process and manage significant databases and periodically, to
expand and upgrade its information processing capabilities. The Company
recognizes the need to ensure its operations will not be adversely impacted by
Year 2000 software failures. The Company has reviewed and continues to review,
on a regular basis, its computer equipment and software systems with regard to
Year 2000 problems. The Company has formulated a plan and methodology for
addressing Year 2000 problems and is currently implementing such plans.
ACQUISITIONS. Century's strategy is to expand aggressively its specialty
insurance and business outsourcing services operations through internal growth
and by acquiring and integrating existing businesses. Century makes its decision
to acquire or invest in businesses based on financial and strategic
considerations. The Company normally funds its acquisitions through a
combination of restricted Common Stock and cash. See "Business and
Properties -- Business Strategy." The businesses acquired to date, with one
exception, have been accounted for under the purchase method of accounting and,
accordingly, are included in the financial statements from the date of
acquisition.
On November 14, 1997, the Company filed two shelf registration statements
with the Securities and Exchange Commission to register an 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 Century currently has sufficient resources,
including cash on hand, cash flow from operating activities, credit facilities
and access to financial markets to fund current and planned operations, service
any outstanding debt and make certain acquisitions. However, substantial
additional capital may be necessary to fully implement Century's aggressive
acquisition program. There can be no assurance that additional financing will be
available on a timely basis, if at all, or that it will be available in the
amounts or on terms acceptable to Century.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact
25
26
included in this Annual Report, including without limitation, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy and plans and
objectives for future performance are forward-looking statements.
Forward-looking statements are commonly identified by the use of such terms and
phrases as "intends," "estimates," "expects," "projects," "anticipates,"
"foreseeable future," "seeks," and words or phases of similar import. Such
statements are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Among the key factors that may have a
direct bearing on Century's results of operations and financial condition are:
(i) Century's ability to grow through acquisitions of strategic and
complementary businesses; (ii) Century's ability to finance such acquisitions;
(iii) Century's ability to manage growth; (iv) Century's ability to integrate
the operations of acquired businesses; (v) Century's ability to attract and
retain experienced personnel; (vii) Century's ability to store, retrieve,
process and manage significant databases; (vii) Century's ability to manage
pricing of its insurance products and adequately reserve for losses; (ix) the
impact of current and future laws and governmental regulations affecting
Century's operations; and (x) market fluctuations in the values or returns on
assets in Century's investment portfolios.
ITEM 7A.
QUANTITATIVE INFORMATION ABOUT MARKET RISK. The Company does not engage in
trading market risk sensitive instruments. Neither does the Company purchase as
investments, hedges or for purposes "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has issued
no debt instruments, entered into no forward or futures contracts, purchased no
options and entered no swaps.
QUALITATIVE INFORMATION ABOUT MARKET RISK. The Company's primary market
risk exposure is that of interest rate risk. A change in the Federal Funds Rate,
or the Reference Rate set by the Bank of America (San Francisco), would affect
the rate at which the Company could borrow funds under its Credit Facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of Directors" in the
Company's definitive proxy statement (the "Proxy Statement") relating to the
1998 Annual Stockholders Meeting (the "Annual Meeting"), is incorporated herein
by reference. The information regarding directors and executive officers of the
Company is contained in Part I of this Annual Report under a separate item
captioned "Directors and Executive Officers of Century Business Services, Inc."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation" in the
Proxy Statement relating to the Annual Meeting is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements.
As to financial statements and supplementary information, reference
is made to "Index to Financial Statements" on page F-1 of this Annual
Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to "Index to
Financial Statements" on page F-1 of this Annual Report.
3. Exhibits.
The following documents are filed as exhibits to this Form 10-K
pursuant to Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the 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).
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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
Century Business Services, Inc. filed the following Current Reports on
Form 8-K during 1997:
Current Report on Form 8-K dated February 19, 1997, as amended on Form
8-K/A filed on April 2, 1997.
Current Report on Form 8-K dated April 3, 1997.
Current Report on Form 8-K dated April 21, 1997.
Current Report on Form 8-K dated July 23, 1997, 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
30
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report........................................................ F-2
Consolidated and Combined Balance Sheets as of
December 31, 1997 and 1996....................................................... F-3
Consolidated and Combined Statements of Income For the Years Ended
December 31, 1997, 1996 and 1995................................................. F-4
Consolidated and Combined Statements of Shareholders' Equity For the Years Ended
December 31, 1997, 1996 and 1995................................................. F-5
Consolidated and Combined Statements of Cash Flows For the Years Ended
December 31, 1997, 1996 and 1995................................................. F-6
Notes to Consolidated and Combined Financial Statements............................. F-7
Schedule I -- Summary of Investments -- Other than Investments in Related
Parties as of December 31, 1997.................................................. F-28
Schedule III -- Supplementary Insurance Information For the Years Ended
December 31, 1997, 1996 and 1995................................................. F-29
Schedule IV -- Reinsurance For the Years Ended
December 31, 1997, 1996 and 1995................................................. F-30
F-1
31
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
CENTURY BUSINESS SERVICES, INC.
We have audited the accompanying consolidated and combined financial
statements of Century 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
Century Business Services, Inc. and Subsidiaries at December 31, 1997 and 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, 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
February 17, 1998
F-2
32
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1997 AND 1996
1997 1996
-------- --------
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................. 14,528 15,481
Securities available for sale, at fair value......................... 59,138 44,684
Mortgage loans....................................................... 1,839 3,685
Short-term investments............................................... 4,215 4,799
-------- --------
Total investments................................................. 79,720 68,649
Deferred policy acquisition costs (Note 8)............................. 4,478 4,345
Reinsurance recoverables (Note 7)...................................... 15,215 11,185
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........................................................... 20,524 6,619
-------- --------
TOTAL ASSETS........................................................... $287,567 $167,330
======== ========
LIABILITIES
Accounts payable....................................................... $ 9,437 $ 136
Losses and loss expenses payable (Note 6).............................. 50,655 41,099
Unearned premiums...................................................... 22,656 18,637
Notes payable, bank debt and capitalized leases (Note 11).............. 20,312 3,211
Income taxes (Note 10)................................................. 2,958 1,994
Accrued expenses....................................................... 27,167 5,355
Other liabilities...................................................... 6,472 5,576
-------- --------
TOTAL LIABILITIES...................................................... 139,657 76,008
-------- --------
SHAREHOLDERS' 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, 1997;
-- 33,764,506 shares at December 31, 1996... 415 338
Additional paid-in capital............................................. 127,517 80,446
Retained earnings...................................................... 18,372 6,842
Net unrealized appreciation of investments (net of tax)................ 1,606 3,696
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................................. 147,910 91,322
-------- --------
Commitments and contingencies (Note 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $287,567 $167,330
======== ========
See the accompanying notes to the consolidated and combined financial
statements.
F-3
33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- ------- -------
Revenues:
Business services fees and commissions..................... $ 63,411 $ 1,606 $ --
Specialty insurance services (regulated):
Premiums earned (Note 7)................................ 37,238 27,651 26,962
Net investment income (Note 4).......................... 4,524 3,564 3,341
Net realized gains on investments (Note 4).............. 3,044 1,529 166
Other income............................................ 13 1,419 470
--------- -------- --------
Total revenues........................................ 108,230 35,769 30,939
Expenses:
Operating expenses -- business services.................... 50,277 1,107 --
Losses and loss adjustment expenses (Note 7)............... 20,682 17,624 15,117
Policy acquisition expenses (Note 8)....................... 9,670 7,699 7,774
Corporate general and administrative expenses.............. 4,578 302 --
Depreciation and amortization expenses..................... 2,612 320 --
Other expenses............................................. 2,331 2,655 3,157
--------- -------- --------
Total expenses........................................ 90,150 29,707 26,048
Income from continuing operations before net corporate
interest income and income tax expense..................... 18,080 6,062 4,891
Net corporate interest income................................ 965 -- --
--------- -------- --------
Income from continuing operations before income tax
expense.................................................... 19,045 6,062 4,891
Income tax expense (Note 10)................................. 6,280 1,640 1,422
--------- -------- --------
Income from continuing operations............................ 12,765 4,422 3,469
Loss from operations of discontinued business (net of income
tax expense (benefit) of $(316), $91 and $0,
respectively).............................................. 663 38 --
Loss on disposal of discontinued business (net of income tax
benefit of $305 in 1997) (Note 15)......................... 572 -- --
--------- -------- --------
Net income............................................ $ 11,530 $ 4,384 $ 3,469
========= ======== ========
Earnings per share (Note 3):
Basic:
Income from continuing operations....................... $ 0.35 $ 0.25 $ 0.24
Loss from discontinued operations....................... (0.04) -- --
--------- -------- --------
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....................... (0.02) --
--------- -------- --------
Net income per share.................................. $ 0.24 $ 0.18 $ 0.20
========= ======== ========
Weighted average common shares.......................... 36,940 17,863 14,760
========= ======== ========
Weighted average common shares and dilutive potential
common shares......................................... 48,904 24,032 16,956
========= ======== ========
See the accompanying notes to the consolidated and combined financial
statements.
F-4
34
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
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED APPRECIATION
SHARES STOCK CAPITAL EARNINGS (DEPRECIATION)
---------- ------ ---------- --------- --------------
December 31, 1994..................... 14,760,000 $148 $ 18,551 $ 6,089 $ (1,208)
Net income.......................... -- -- -- 3,469 --
Pre-merger capital contribution from
parent........................... -- -- 595 -- --
Pre-merger dividends paid to
parent........................... -- -- -- (5,350) --
Change in unrealized depreciation,
net of deferred taxes............ -- -- -- -- 4,474
----------- ----- --------- -------- -------
December 31, 1995..................... 14,760,000 148 19,146 4,208 3,266
Net income.......................... -- -- -- 4,384 --
Pre-merger capital contribution from
parent........................... -- -- 595 -- --
Pre-merger dividends paid to
parent........................... -- -- -- (1,750) --
Change in unrealized appreciation,
net of deferred taxes............ -- -- -- -- 430
Reverse merger...................... 10,858,158 108 16,136 -- --
Stock issuances..................... 7,251,888 73 38,164 --
Stock options....................... 101,960 1 1,153 -- --
Business acquisitions............... 792,500 8 5,252 -- --
----------- ----- --------- -------- -------
December 31, 1996..................... 33,764,506 338 80,446 6,842 3,696
Net income.......................... -- -- -- 11,530 --
Change in unrealized appreciation,
net of deferred taxes............ -- -- -- -- (2,090)
Reverse merger
Stock issuances..................... 616,611 6 5,261 -- --
Stock options....................... 53,032 1 334 -- --
Warrants............................ 533,032 5 2,819 -- --
Business acquisitions............... 6,496,918 65 38,657 -- --
----------- ----- --------- -------- -------
December 31, 1997..................... 41,464,099 $415 $ 127,517 $18,372 $ 1,606
=========== ===== ========= ======== =======
See the accompanying notes to the consolidated and combined financial
statements.
F-5
35
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 1996 AND 1995
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations............................ $ 12,765 $ 4,422 $ 3,469
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of business.................................... (171) -- --
Net loss from operations of discontinued business........... (663) (38) --
Net loss on disposal of discontinued business............... (572) -- --
Deprecation and amortization................................ 12,282 7,969 8,143
Deferred income taxes....................................... (958) (27) (699)
Cash provided by (used in) changes in assets and liabilities,
net of acquisitions and dispositions:
Accounts receivable, net.................................. (13,437) -- --
Premiums receivable, net.................................. 3,117 (915) (62)
Deferred policy acquisition costs......................... (9,803) (8,616) (7,476)
Reinsurance recoverables, net............................. (4,030) 1,462 (1,671)
Other assets.............................................. (6,166) (1,540) (527)
Accounts payable.......................................... 6,069 136 --
Losses and loss expenses payable.......................... 6,947 4,097 2,341
Unearned premiums......................................... (1,582) 3,001 183
Income taxes.............................................. 889 646 725
Accrued expenses.......................................... 16,505 1,105 533
Other liabilities......................................... (1,855) 3,156 1,242
Non-cash charges and working capital changes from
discontinued operations................................. (15,620) -- --
Other, net................................................ 993 (1,693) (2,599)
-------- -------- --------
Net cash provided by operating activities...................... 4,710 13,165 3,602
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities, held to maturity................... (869) (1,318) (269)
Purchase of fixed maturities, available for sale................. (21,222) (12,408) (9,552)
Purchase of equity securities, available for sale................ (2,816) (2,921) (228)
Redemption of fixed maturities, held to maturity................. 1,172 1,000 1,281
Sale of fixed maturities, available for sale..................... 6,006 9,333 7,089
Sale of equity securities, available for sale.................... 1,285 675 150
Increase in mortgage loans....................................... -- (1,275) (1,342)
Principal receipts on mortgage loans............................. 1,846 983 910
Change in short-term investments................................. 584 (3,956) 27
Business acquisitions, net of cash acquired...................... (35,822) 912 --
Proceeds from dispositions of businesses......................... 10,700 -- --
Acquisition of property and equipment, net....................... (2,284) (286) (223)
-------- -------- --------
Net cash used in investing activities.......................... (41,420) (9,261) (2,157)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Pre-merger dividends paid to parent.............................. -- (1,750) (5,350)
Proceeds from debt............................................... 13,416 -- --
Repayment of debt................................................ (6,233) (836) (295)
Proceeds from stock issuances.................................... 5,267 38,237 --
Proceeds from exercise of stock options and warrants............. 3,159 -- --
-------- -------- --------
Net cash provided by (used in) financing activities............ 15,609 35,651 (5,645)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............... (21,101) 39,555 (4,200)
Cash and cash equivalents at beginning of year..................... 42,249 2,694 6,894
-------- -------- --------
Cash and cash equivalents at the end of year:
Continuing operation............................................. 21,148 39,874 2,694
Discontinued operations.......................................... -- 2,375 --
-------- -------- --------
Total cash and cash equivalents at end of year..................... $ 21,148 $ 42,249 $ 2,694
======== ======== ========
See the accompanying notes to the consolidated and combined financial
statements.
F-6
36
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Century Business Services, Inc. and subsidiaries (the "Company") is a
diversified services organization which, acting through its subsidiaries,
provides outsourced business services, including specialty insurance services,
to small and medium 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 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, 1997 and 1996;
ii. Consolidated and Combined Statements of Income of the Company for
the years ended December 31, 1997, 1996 and 1995:
iii. Consolidated and Combined Statements of Shareholders' Equity of
the Company for the years ended December 31, 1997, 1996 and 1995;
iv. Consolidated and Combined Statements of Cash Flows of the Company
for the years ended December 31, 1997, 1996 and 1995.
The following are significant accounting policies followed by the Company.
Basis of Consolidation
The Company's consolidated and combined financial statements include the
accounts of all wholly owned subsidiaries. All significant intercompany accounts
and transactions have been 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 a 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 to be
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 was approximately
$1,334,000, $33,000 and $0 in 1997, 1996 and 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 adopted 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 common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if common stock equivalents were exercised and then
shared in the earnings of the Company.
F-8
38
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Investments
In accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, all fixed maturity securities that the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and are stated at amortized cost; all other fixed maturity securities
and all equity securities are classified as available for sale and are stated at
fair value, with the unrealized gains and losses, net of deferred income tax,
reported as a separate component of shareholders' equity. The Company has no
investment securities classified as trading. Realized gains and losses on the
sale of investments are determined on the basis of specific security
identification and also includes other than temporary declines, if any. Interest
income is recognized on the accrual basis and dividend income is recognized on
the ex-dividend date.
Deferred Policy Acquisition Costs
Acquisition costs, consisting of commissions, premium taxes and certain
underwriting expenses that vary with and are primarily related to the production
of business, are deferred and amortized ratably over the policy term. The method
used limits the amount to its estimated realizable value which gives effect to
the premium to be earned, the incurrence of loss and loss expenses and certain
other costs expected to be incurred as premium is earned.
Stock Options
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, 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 adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and 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 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 is the risk that the premium charged for insurance
and insurance related products are insufficient to cover the costs associated
with the distribution of such products which include: claim and loss costs, loss
adjustment expenses, acquisition expenses, and other corporate expenses. The
Company utilizes a variety of actuarial and other qualitative methods to set
such levels
Adverse Loss Development and Incurred But Not Reported ("IBNR") Risk is the
risk inherent in the handling and settling of claims whose ultimate costs, which
include loss costs, loss adjustment expenses, and other related expenses, are
unknown at the time the claim is presented. An associated risk relates to claims
which have been incurred, but for which the Company has no knowledge. The
Company makes judgments as to the ultimate costs of presented claims and makes a
provision for their future payment by establishing reserves for existing claims
(case reserves) and for IBNR claims, however, there can be no assurance that the
amounts reserved will be adequate to ultimately make all required payments.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will occur and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits or new legal
theories may create costs for the insurer beyond those recorded in the financial
statements. The Company is exposed to this risk by writing approximately 26% of
its business in Ohio and surrounding states and 41% in California, thus
increasing its exposure in these particular regions. This risk is reduced by
underwriting and loss adjusting practices that identify and minimize the adverse
impact of this risk.
Credit Risk is the risk that issuers of securities and mortgagors of the
mortgages owned by the Company will default, or other parties, including
reinsurers that owe the Company money, will not pay. The Company minimizes this
risk by adhering to a conservative investment strategy, by maintaining sound
reinsurance and credit and collection policies, and by providing for any amounts
deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates this
risk by attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities. To the extent that liabilities come due
more quickly than assets mature, an insurer would have to sell assets prior to
maturity and recognize a gain or loss. Management believes that the Company's
positive cash flow from investment income and operations will enable the Company
to operate without having to recognize significant losses from the sale of
investments that have an unrealized holding loss as of December 31, 1997.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
F-10
40
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
During fiscal 1997, the Company continued its strategic acquisition
program, purchasing the businesses of 39 complementary companies. These
acquisitions comprised the following: ten accounting systems and tax advisory
businesses, including Comprehensive Business Services, Inc. ("Comprehensive"), a
franchisor of accounting services; eight specialty insurance businesses; four
workers' compensation administration businesses; ten payroll administration/
benefits design and administration firms; three human resources/executive search
firms; one valuation and appraisal group; two technology firms; and one
broker/dealer.
These acquisitions, with the exception of Business Management Services,
Inc. and BMS Employee Benefits, Inc., (collectively, "BMS") were accounted for
as a purchase, and accordingly, the operating results of the acquired companies
have been included in the accompanying consolidated and combined financial
statements since the dates of acquisition. The BMS acquisition was accounted for
using the "pooling of interests" method of accounting. The Company's prior
period financial statements have not been restated for the BMS acquisition as
the transaction was considered immaterial.
The aggregate purchase price of the aforementioned acquisitions was
approximately $87.748 million, and includes future contingent consideration of
up to $5.880 million in cash and 1,716,226 shares of restricted common stock,
with an estimated stock value at date of acquisition of $17.848 million, based
on the acquired companies' ability to meet certain performance goals. The
aggregate purchase price, comprised of cash payments, issuance of promissory
notes, and issuance of Common Stock, has been allocated to the net assets of the
Company based upon their respective fair market values. The excess of the
purchase price over net assets acquired (goodwill) approximated $89.856 million
and is being amortized over periods not exceeding 30 years. As a result of the
nature of the assets and liabilities of the businesses acquired, there were no
material identifiable intangible assets or liabilities.
The Company considers the following acquisitions as significant, and as
such, are discussed separately below:
In January 1997, Century acquired certain of the assets and business
of Midwest Indemnity Corporation ("Midwest"), in exchange for $3.3 million
in cash, 407,246 shares of restricted Common Stock and $1.8 million in
non-interest bearing notes payable in installments 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, 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
-------- --------
Net revenues -- pro forma............................. $188,793 $159,689
======== ========
Net income -- pro forma............................... $ 14,347 $ 10,084
======== ========
Earnings per common share -- pro forma
-- basic....................................... $ 0.35 $ 0.30
======== ========
-- diluted..................................... $ 0.27 $ 0.25
======== ========
3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. The Company adopted this standard, as required, for its
December 31, 1997 financial statements. For the years presented, the Company
presents both basic and diluted earnings per share. The following data shows the
amounts used in computing earnings per share and the effect on the weighted
average number of shares of dilutive potential common stock.
FOR THE YEAR ENDED 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
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 $ 0.25
------
Warrants........................................ -- 6,001
Options......................................... -- 168
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations plus assumed
conversions................................... $ 4,422 24,032 $ 0.18
======= =======
------
F-12
42
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 1995
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EARNINGS PER SHARE
Income from continuing operations............... $ 3,469 14,760 $ 0.24
-------
Warrants........................................ -- 2,196
------- -------
DILUTED EARNINGS PER SHARE
Income from continuing operations plus assumed
conversions................................... $ 3,469 16,956 $ 0.20
======= ======= -------
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earning per common share for the years 1997 and 1996 were determined on
the assumption that the options and warrants were exercised at the beginning of
the period, or at time of issuance, if later. As a result, the Company's
reported earnings per share for 1996 and 1995 were restated. The effect of this
accounting change on previously reported earnings per share (EPS) data was as
follows:
As a result of the adoption of SFAS No. 128 in 1997, the Company's reported
earnings per share for 1996 and 1995 were restated. The effect of this
accounting change on previously reported earnings per share (EPS) was as
follows:
1996 1995
------ ------
Per share amount
Primary EPS as reported................................... $ 0.21 $ 0.20
Effect of SFAS No. 128.................................... 0.04 0.04
------ ------
Basic EPS as restated..................................... $ 0.25 $ 0.24
====== ======
Fully diluted EPS as reported............................. $ 0.16 $ 0.20
Effect of SFAS No. 128.................................... 0.02 --
------ ------
Diluted EPS as restated................................... $ 0.18 $ 0.20
====== ======
4. INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1997 were as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........... $ 6,971 $ 47 $ 17 $ 7,001
Corporate securities................... 6,810 14 34 6,790
Foreign corporate bonds................ 317 16 -- 333
Mortgage-backed securities............. 430 8 -- 438
------- ---- ---- -------
Totals.............................. $14,528 $ 85 $ 51 $ 14,562
======= ==== ==== =======
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
--------- ---------- ---------- ----------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........... $ 7,681 $ 179 $ 17 $ 7,843
Corporate securities................... 16,817 226 7 17,036
Foreign corporate bonds................ 1,009 -- 32 977
Mortgage-backed securities............. 13,402 338 5 13,735
Other-assets backed securities......... 11,842 120 8 11,954
------- ------ ---- -------
50,751 863 69 51,545
Equity securities........................ 6,163 1,580 150 7,593
------- ------ ---- -------
Totals................................. $56,914 $2,443 $219 $ 59,138
======= ====== ==== =======
Expected maturities will differ from contractual maturities because the
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized cost and estimated fair value of fixed
maturities held to maturity at December 31, 1997, by contractual maturity, were
as follows (in thousands):
AMORTIZED ESTIMATED
COST FAIR VALUE
------- ----------
Due in one year or less.................................. $ 4,306 $ 4,291
Due after one year through five years.................... 9,361 9,384
Due after five years through ten years................... 355 356
Due after ten years...................................... 76 93
------- -------
14,098 14,124
Mortgage-backed securities............................... 430 438
------- -------
$14,528 $ 14,562
======= =======
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 1997, by contractual maturity, were as follows (in
thousands):
AMORTIZED ESTIMATED
COST FAIR VALUE
------- ----------
Due in one year or less.................................. $ 2,557 $ 2,552
Due after one year through five years.................... 15,971 16,180
Due after five years through ten years................... 6,237 6,353
Due after ten years...................................... 742 771
------- -------
25,507 25,856
Mortgage-backed securities............................... 13,402 13,735
Other asset-backed securities............................ 11,842 11,954
------- -------
$50,751 $ 51,545
======= =======
F-14
44
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1996 were as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 6,136 $ 28 $ 65 $ 6,099
Corporate securities..................... 8,850 18 96 8,772
Mortgage-backed securities............... 495 10 -- 505
------- ---- ---- -------
Totals................................. $15,481 $ 56 $161 $ 15,376
======= ==== ==== =======
The amortized cost and estimated fair value of securities available for
sale at December 31, 1996 were as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........... $16,067 $ 224 $ 93 $ 16,198
Corporate securities................... 10,962 87 66 10,983
Mortgage-backed securities............. 8,092 207 9 8,290
------- ------ ---- -------
35,121 518 168 35,471
Equity securities........................ 4,349 5,022 158 9,213
------- ------ ---- -------
Totals................................. $39,470 $5,540 $326 $ 44,684
======= ====== ==== =======
Net investment income was comprised of the following for the years ended
December 31 as follows (in thousands):
1997 1996 1995
------- ------- -------
Interest........................................ $ 4,519 $ 3,652 $ 3,455
Dividends....................................... 341 142 96
------- ------- -------
Total investment income....................... 4,860 3,794 3,551
Less: investment expense........................ (336) (230) (210)
------- ------- -------
Net investment income......................... $ 4,524 $ 3,564 $ 3,341
======= ======= =======
F-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
------- ------- -------
Realized gains:
Available for sale:
Fixed maturities........................... $ 26 $ 117 $ 114
Equity securities.......................... 3,066 1,381 9
Other......................................... -- 125 73
------- ------- -------
Total realized gains....................... 3,092 1,623 196
------- ------- -------
Realized losses:
Available for sale:
Fixed maturities........................... 10 32 27
Equity securities.......................... 38 35 3
Other......................................... -- 27 --
------- ------- -------
Total realized losses...................... 48 94 30
------- ------- -------
Net realized gains on investments............. $ 3,044 $ 1,529 $ 166
======= ======= =======
The change in net unrealized appreciation (depreciation) of investments is
summarized as follows (in thousands):
1997 1996 1995
------- ------- -------
Available for sale:
Fixed maturities.............................. $ 444 $ (708) $ 2,147
Equity securities............................. (3,434) 1,437 3,583
------- ------- -------
$(2,990) $ 729 $ 5,730
======= ======= =======
The components of unrealized appreciation on securities available for sale
at December 31 were as follows (in thousands):
1997 1996 1995
------- ------- -------
Gross unrealized appreciation................... $ 2,224 $ 5,214 $ 4,485
Deferred income tax............................. (618) (1,518) (1,219)
------- ------- -------
Net unrealized appreciation................... $ 1,606 $ 3,696 $ 3,266
======= ======= =======
Fixed maturities held to maturity and certificates of deposit with a
carrying value of approximately $9,869,000 and $8,939,000 at December 31, 1997
and December 31, 1996, respectively, were on deposit with regulatory authorities
as required by law. At December 31, 1997 and 1996 all mortgage loans were
secured by 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 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 submitted to a
vote of stockholders. There are no cumulative voting rights with respect to the
election of directors. Accordingly, the holder or holders of a majority of the
outstanding shares of Common Stock will be able to elect the entire 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 behalf of certain selling shareholders in order to permit the public or
private sale or other public or private distribution of the Shares. Accordingly,
the Company will not receive any proceeds for these Shares.
In 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 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.
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.
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
47
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (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. As a result of the sale
of RESI in July 1997, options under these plans became immediately vested and
exercisable. These options, which expire in July 1998, remain vested as long as
the optionee is employed by the former parent, RESI or their affiliates. The
option price is based on the fair market value of the common shares on the date
of grant.
Information relating to the stock option plans is summarized below:
1997 1996
--------- --------
Outstanding at beginning of year......................... 317,072 190,200
Granted (a).............................................. 1,870,500 230,000
Exercised (b)............................................ (53,032) (101,960)
Expired or canceled...................................... (74,000) (1,168)
--------- ---------
Outstanding at end of year (c)...................... 2,060,540 317,072
--------- ---------
Exercisable at end of year (d)...................... 567,640 22,320
========= =========
Available for future grant at the end of year............ 342,500 273,000
========= =========
F-18
48
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Options were granted at 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 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 December 31, 1997 and 1996 averaged $7.11 and $2.18,
respectively.
Had the cost of stock option plans been determined based on the provision
of SFAS No. 123, the Company's net income and earnings per share pro forma
amounts would be as follows (in thousands):
(UNAUDITED)
AS REPORTED PRO FORMA
------------------ ------------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------
1997
Net income............................ $11,530.. $11,530 $11,198 $11,198
======= ======= ======= =======
Net income per common share........... $ 0.31 $ 0.24 $ 0.30 $ 0.23
======= ======= ======= =======
1996
Net income............................ $ 4,384 $ 4,384 $ 4,358 $ 4,358
======= ======= ======= =======
Net income per common share........... $ 0.25 $ 0.18 $ 0.24 $ 0.18
======= ======= ======= =======
1995
Net income............................ $ 3,469 $ 3,469 $ 3,468 $ 3,468
======= ======= ======= =======
Net income per common share........... $ 0.24 $ 0.20 $ 0.23 $ 0.20
======= ======= ======= =======
The above results may not be representative of the effects of SFAS No. 123
on net income for future years.
The Company applied the Black-Scholes option-pricing model to determine the
fair value of each option granted in 1997, 1996 and 1995. Below is a summary of
the assumptions used in the calculation:
1997 1996 1995
----- ----- -----
Risk-free interest rate.............................. 6.01% 6.03% 6.21%
Dividend yield....................................... -- -- --
Expected volatility.................................. 35.00% 35.00% 35.00%
Expected option life (in years)...................... 3.75 3.75 3.75
The stock options issued to key employees in 1996 were assumed to vest at a
rate of 100%.
F-19
49
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity in the liability for unpaid losses and loss expenses is summarized
as follows (in thousands):
1997 1996 1995
------- ------- -------
Balance at January 1............................ $41,099 $37,002 $34,661
Less: Reinsurance recoverables, net........... 8,114 8,914 9,383
------- ------- -------
Net balance at January 1...................... 32,985 28,088 25,278
------- ------- -------
Incurred related to:
Current year.................................. 21,839 17,216 17,297
Prior years................................... (1,157) 408 (2,180)
------- ------- -------
Total incurred............................. 20,682 17,624 15,117
------- ------- -------
Paid related to:
Current year.................................. 2,468 3,684 5,963
Prior years................................... 8,800 9,043 6,344
------- ------- -------
Total paid................................. 11,268 12,727 12,307
------- ------- -------
Net balance at December 31...................... 42,399 32,985 28,088
Plus: reinsurance recoverables, net........... 8,256 8,114 8,914
------- ------- -------
Balance at December 31.......................... $50,655 $41,099 $37,002
======= ======= =======
In 1997 and 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, 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
50
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The impact of reinsurance is as follows (in thousands):
1997 1996 1995
-------- -------- --------
Premiums written:
Direct...................................... $ 47,488 $ 42,420 $ 36,278
Assumed..................................... 12,263 468 1,417
Ceded....................................... (22,263) (11,739) (11,018)
------- ------- -------
Net...................................... $ 37,488 $ 31,149 $ 26,677
======= ======= =======
Premiums earned:
Direct...................................... $ 48,085 $ 39,311 $ 36,005
Assumed..................................... 7,647 576 1,507
Ceded....................................... (18,494) (12,236) (10,550)
------- ------- -------
Net...................................... $ 37,238 $ 27,651 $ 26,962
======= ======= =======
Losses and loss expense incurred:
Direct...................................... $ 20,135 $ 18,618 $ 16,342
Assumed..................................... 2,820 210 1,223
Ceded....................................... (2,273) (1,204) (2,448)
------- ------- -------
Net...................................... $ 20,682 $ 17,624 $ 15,117
======= ======= =======
The reinsurance payables were $7,828,000, $2,869,000 and $2,259,000 at
December 31, 1997, 1996 and 1995, respectively.
Reinsurance recoverables were comprised of the following as of December 31
(in thousands):
1997 1996 1995
------- ------- -------
Recoverables on unpaid losses and loss
expenses...................................... $ 8,256 $ 8,114 $ 8,914
Receivables on ceding commissions and other..... 5,851 2,702 2,892
Receivables on paid losses and expenses......... 1,108 369 841
------- ------- -------
$15,215 $11,185 $12,647
======= ======= =======
The Company evaluates the financial condition of its reinsurers and
establishes a valuation allowance as reinsurance receivables are deemed
uncollectible. During 1997, the majority of ceded amounts were ceded to Republic
Western Insurance Company, Reliance Insurance Company, General Reinsurance
Corporation, Kemper Insurance Company and Gulf Insurance Company. The Company
monitors concentrations of risks arising from similar geographic regions or
activities to minimize its exposure to significant losses from catastrophic
events.
8. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs were as 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
51
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limits the payment of dividends by a 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,
which was $5.2 million at December 31, 1997.
The consolidated and combined financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The Company's
insurance subsidiaries file annual financial statements with the Ohio Department
of Insurance and Utah Department of Insurance and are prepared on the basis of
accounting practices prescribed by such regulatory authorities, which differ
from GAAP. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
prescribed. All material transactions recorded by the Company's insurance
subsidiaries are in accordance with prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital ("RBC") formula. This model act requires every property and casualty
insurer to calculate its total adjusted capital and RBC requirement, and
provides for an insurance commissioner to intervene if the insurer experiences
financial difficulty. The model act became law in Ohio in March 1996, and in
Utah in April 1996, states where certain subsidiaries of the Company are
domiciled. The RBC formula includes components for asset risk, liability risk,
interest rate exposure and other factors. The Company's insurance subsidiaries
exceeded all required RBC levels as of December 31, 1997 and 1996.
CSC's statutory net income for the years ended December 31, 1997, 1996 and
1995 was approximately $5.2 million, $1.9 million and $3.7 million,
respectively, and the statutory capital and surplus as of December 31, 1997 and
1996 was approximately $31.5 million and $26.0 million, respectively.
10. INCOME TAXES
A summary of income tax expense (benefit) included in the Consolidated and
Combined Statements of Income is as follows (in thousands):
1997 1996 1995
------ ------ ------
Continuing operations:
Current:
Federal.................................. $6,523 $1,654 $2,121
State and local.......................... 715 13 --
----- ----- -----
7,238 1,667 2,121
Deferred:
Federal.................................. (897) (27) (699)
State and local.......................... (61) -- --
----- ----- -----
(958) (27) (699)
----- ----- -----
Total continuing operations................. 6,280 1,640 1,422
Discontinued operations....................... (621) 91 --
----- ----- -----
$5,659 $1,731 $1,422
===== ===== =====
F-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
------ ------ ------
Tax at statutory rate (34%)........................ $6,475 $2,061 $1,663
State taxes (net of federal benefit)............... 411 -- --
Change in valuation allowance...................... (875) (589) (169)
Tax exempt interest and dividends received
deduction........................................ (78) (33) (106)
Nondeductible goodwill............................. 383 -- --
Change in estimated liabilities.................... -- 196 --
Other, net......................................... (36) 5 34
------ ------ ------
Provision for income taxes from continuing
operations....................................... $6,280 $1,640 $1,422
====== ====== ======
Effective income tax rate.......................... 33.0% 27.1% 29.1%
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996, are as follows (in thousands):
1997 1996
------- -------
Deferred tax assets:
Loss expenses payable discounting............................. $ 2,852 $ 2,176
Net operating loss carryforwards.............................. 2,696 1,136
Unearned premiums not deductible.............................. 1,122 1,105
Deferred compensation......................................... 632 --
Allowance for doubtful accounts............................... 388 --
Other deferred tax assets..................................... 97 151
------ ------
Total gross deferred tax assets............................ 7,787 4,568
Less: valuation allowance.................................. (2,135) (1,379)
------ ------
Net deferred tax assets.................................... 5,652 3,189
------ ------
Deferred tax liabilities:
Change in accounting method................................... 3,199 --
Unrealized appreciation on investments........................ 618 1,518
Deferred policy acquisition costs............................. 1,523 1,477
Reinsurance recoverable....................................... 408 302
Other deferred tax liabilities................................ 235 219
------ ------
Total gross deferred tax liabilities....................... 5,983 3,516
------ ------
Net deferred tax liability, included in income taxes in the
consolidated and combined balance sheets................... $ 331 $ 327
====== ======
Net deferred tax liability attributable to discontinued
operations, included in net assets held for disposal....... $ -- $ 1,340
The company had net operating loss ("NOL") carryforwards of approximately
$7,500,000 and $3,300,000 at December 31, 1997 and 1996, respectively, from the
separate return years of certain acquired entities. These losses are subject to
limitations regarding the offset of the company's future taxable income and will
begin to expire in 2007.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
determines a valuation allowance based on their analysis of amounts available in
the statutory carryback period, consideration of future deductible amounts, and
assessment of the
F-23
53
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
separate company profitability of certain acquired entities. The Company has
established valuation allowances for portions of acquired NOL carryforwards and
other deferred tax assets. The net change in the valuation allowance for the
years ended December 31, 1997 and 1996 was a increase of $756,000 and decrease
of $589,000, respectively. The portion of the valuation allowance for deferred
tax assets for which subsequently recognized tax benefits will be allocated to
reduce goodwill of acquired entities is $756,000 and $0 at December 31, 1997 and
1996, respectively.
11. NOTES PAYABLE, BANK DEBT AND CAPITALIZED LEASES
The Company maintains lines of credit with several banks. The Company's
primary line of credit is a $50,000,000 revolving credit facility with several
financial institutions, with Bank of America as Agent, and expires October 3,
2000. At December 31, 1997, approximately $8,200,000 was outstanding under such
credit facility. The Company's lines of credit are subject to normal banking
terms and conditions and the Company's subsidiaries capital stock are pledged as
collateral.
Notes Payable, Debt and Capitalized Leases
Notes payable, bank debt and capitalized leases, consists of the following
(in thousands):
DECEMBER 31
------------------
1997 1996
------- -------
Promissory notes payable to shareholders, with rates from
5.9% to 16.0%, due 1998 to 2012.......................... $ 8,523 $ 3,200
Other notes payable, with rates from 6.0% to 14.8%, due
1998 to 2005............................................. 3,311 --
Revolving credit facility, effective rate of 8.50%......... 8,200 --
Capitalized leases, various rates, payable in installments
through 2001............................................. 131 11
Other...................................................... 147 --
------- -------
$20,312 $ 3,211
======= =======
At December 31, 1997 aggregate maturities of notes payable, bank debt and
capitalized leases, were as follows (in thousands):
YEARS ENDING
DECEMBER 31,
- -----------------------------------------------------------
1998................................................ $16,997
1999................................................ 873
2000................................................ 395
2001................................................ 542
2002................................................ 270
Thereafter.......................................... 1,235
-------
$20,312
=======
Management believes that the carrying amounts of notes payable, bank debt
and capitalized leases recorded at December 31, 1997 were not impaired and
approximate fair values.
F-24
54
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain of its premises and equipment under various
operating lease agreements. At December 31, 1997, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
YEARS ENDING
DECEMBER 31,
- -----------------------------------------------------------
1998................................................ $ 6,800
1999................................................ 6,007
2000................................................ 5,052
2001................................................ 3,955
2002................................................ 3,260
Thereafter.......................................... 10,689
-------
$35,763
=======
Total rental expense incurred under operating leases was approximately
$3,588,000, $454,000 and $411,000 in 1997, 1996 and 1995, respectively.
Other
In the ordinary course of business, the Company is a defendant in various
lawsuits. In the opinion of management, the effects, if any, of such lawsuits
are not expected to be material to the Company's results of operations or
financial position.
The Company has profit sharing plans covering substantially all of its
employees. Participating employees may elect to contribute, on a tax deferred
basis, a portion of their compensation, in accordance with Section 401(k) of the
Internal Revenue Code. Employer contributions made to the plan for 1997, 1996
and 1995, amounted to approximately $674,000, $240,000 and $141,000,
respectively.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company recorded the acquisition of RESI as a non-cash transaction
consisting of a $4,000,000 promissory note and recapitalization of shareholders'
equity of $16,244,000. Additionally, during 1996, the Company acquired, in
exchange for 792,500 shares of its common stock, and other consideration, 100%
of SMR and ECI, which were also recorded as non-cash transactions.
Cash Paid During the Year for (in thousands):
1997 1996 1995
------ ------ ------
Interest........................................... $ 348 $ 60 $ 216
====== ====== ======
Income Taxes....................................... $5,753 $1,290 $ 128
====== ====== ======
14. RELATED PARTIES
The Company's Executive Vice President ("EVP"), who is also a director, and
one of the Company's Senior Vice Presidents were each a one-third owner of SMR.
In addition, in connection with the SMR acquisition, the EVP received 195,600
shares of common stock and 293,400 warrants to purchase additional shares of
common stock at an exercise price of $10.375. The office building utilized by
SMR Business Services Co. is leased under a ten-year lease from a partnership in
which the EVP and one of the Senior Vice President's are each indirectly, a
one-third owner.
F-25
55
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's investment portfolios include loans to business organizations
associated with a relative of a shareholder of the Company, which aggregate
$1,200,000. These loans provide for interest payments of 9% per annum only until
maturity, which range from December 31, 1998 through April 30, 1999.
The EVP and one of the Senior Vice President's are partners (among others)
in SMR & Co. CPA, which buys services from a subsidiary of the Company.
Collectively, these two officers hold a 9% interest in the partnership.
The Company has a $225,000, non-interest bearing note receivable from Sofia
Management Ltd., a 5% shareholder of the Company.
15. DIVESTITURES
In February 1997, the Company signed a letter of intent to sell the
Company's Environmental Services business. In July 1997, the Company sold the
majority of its environmental services business, and in September 1997, sold its
remaining environmental operations. Taken together, these transactions for cash
and notes resulted in a net loss of $572,000. The Company's contingent liability
is limited to $1.5 million in connection with such divestitures. Management does
not believe the Company will experience a loss in connection with such
contingencies.
In December 1997, the Company sold Environmental and Commercial Insurance
Agency, Inc. and Environmental and Commercial Insurance Agency of LA, Inc. for
cash consideration, resulting in a gain of approximately $171,000.
16. SUBSEQUENT EVENTS
On January 2, 1998, the Company completed the acquisition of Bass
Consultants, Inc., located in Houston, Texas, for 626,966 shares of common
stock. Bass Consultants, Inc. provides benefits administration services.
On January 6, 1998, the Company completed the acquisition of Rootberg
Business Services, Inc., located in in Chicago, Illinois, for $5,100,000 in cash
and 482,353 shares of restricted stock. Rootberg Business Services, Inc.
provides accounting and business services.
On January 15, 1998, the Company announced it had entered into agreements
to acquire three accounting firms. The firms involved are (a) Braunsdorf,
Carlson & Clinkinbeard, CPA's P.A. and Bushman & Associates, CPA's P.A. ("The
BCC Group"), of Topeka, Kansas, (b) Kaufman Davis, Inc., of Bethesda, Maryland,
and (c) Seitz, Kate, Medve, Inc., of Cleveland, Ohio. On January 30, 1998, the
Company completed the acquisition of the BCC Group and Seitz, Kate, Medve, Inc.
The BCC Group serves client niches in construction, low-income housing,
nonprofit and government, credit unions, hospitality, retirement homes, and
litigation support. Kaufman Davis, Inc. provides accounting and management
consulting services. Seitz, Kate, Medve, Inc. provides financial, tax, estate
and investment planning services. The combined cost of these transactions is a
maximum of $4,600,000 in cash and a maximum of $6,200,000 of restricted Company
common stock.
On February 6, 1998, in connection with a private placement of 5,000,000 of
the Company's Common Stock consisting of 3,800,000 newly-issued shares and
1,200,000 shares of outstanding Common Stock offered by certain selling
shareholders, the Company received a subscription for 500,000 shares from an
affiliate of the Company's Chairman, President and Chief Executive Officer. The
purchase of these shares by one of the Company's largest shareholders, Westbury
(Bermuda) Ltd. is conditioned, among other things, to shareholder approval at
the Annual Meeting scheduled for April 30, 1998.
F-26
56
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly financial data are summarized as follows (amounts in thousands,
except per share amounts):
1997 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- --------------------------------------------- --------- -------- ------------- ------------
Revenues..................................... $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 operations............ $ 655 $ 771 $ 839 $ 2,157
Loss from discontinued operations............ -- -- -- (38)
------- ------- ------- -------
Net income................................. $ 655 $ 771 $ 839 $ 2,119
======= ======= ======= =======
Earnings per common share:
Basic --
Continuing operations................... $ .04 $ .05 $ .06 $ .09
Discontinued operations................. -- -- -- --
------- ------- ------- -------
Net income per share....................... $ .04 $ .05 $ .06 $ .09
======= ======= ======= =======
Earnings per common share:
Diluted --
Continuing operations................... $ .04 $ .05 $ .03 $ .06
Discontinued operations................. -- -- -- --
------- ------- ------- -------
Net income per share....................... $ .04 $ .05 $ .03 $ .06
======= ======= ======= =======
Weighted average common shares............... 14,760 14,760 14,760 23,850
======= ======= ======= =======
Weighted average common shares and diluted
potential common shares:................... 16,956 16,956 28,100 33,703
======= ======= ======= =======
F-27
57
CENTURY BUSINESS SERVICES, INC.
SCHEDULE I -- SUMMARY OF INVESTMENT -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D
- -------------------------------------------------- -------- -------- -------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- -------------------------------------------------- -------- -------- -------------
Fixed maturities--held in maturity:
Bonds:
U.S. government and government agencies and
authorities.................................. $ 6,971 $ 7,001 $ 6,971
Corporate securities............................ 6,810 6,790 6,810
Foreign corporate bonds......................... 317 333 317
Mortgage-backed securities...................... 430 438 430
Fixed maturities--available for sale:
Bonds:
U.S. government and government agencies and
authorities.................................. 7,681 7,843 7,843
Corporate securities............................ 16,817 17,036 17,036
Foreign corporate bonds......................... 1,009 977 977
Mortgage-backed securities...................... 13,402 13,735 13,735
Other-assets backed securities.................. 11,842 11,954 11,954
------ ------ ------
Total fixed maturities..................... 65,279 66,107 66,073
------ ------ ------
Equity securities:
Common Stock:
Public utilities................................ 311 364 364
Banks, trust and insurance Companies............ 46 82 82
Industrial, miscellaneous and all other......... 1,265 2,577 2,577
Nonredeemable preferred stocks.................... 4,541 4,570 4,570
------ ------ ------
Total equity securities.................... 6,163 7,593 7,593
------ ------ ------
Mortgage loans on real estate..................... 1,839 1,839
Short-term investments............................ 4,215 4,215
------ ------
Total investments.......................... $77,496 $79,720
====== ======
See accompanying Independent Auditors' Report.
F-28
58
CENTURY BUSINESS SERVICES, INC.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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
- --------------------------------- -------- ------------- ------------ ---------- --------
Year Ended:
December 31, 1997.............. $ 4,478 $50,655 $ 22,656 N/A $37,238
December 31, 1996.............. 4,345 41,009 18,637 N/A 27,651
December 31, 1995.............. 3,428 37,002 15,636 N/A 26,962
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------- ------------- ------------ ---------- --------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER DIRECT
INVESTMENT LOSSES AND ACQUISITION OPERATING PREMIUMS
INCOME LOSS EXPENSE COSTS EXPENSES WRITTEN
-------- ------------- ------------ ---------- --------
Year Ended:
December 31, 1997.............. $ 4,524 $20,682 $ 9,670 $ 2,677 $47,488
December 31, 1996.............. 3,564 17,624 7,699 2,951 42,420
December 31, 1995.............. 3,341 15,117 7,774 3,157 36,278
See accompanying Independent Auditors' Report.
F-29
59
CENTURY BUSINESS SERVICES, INC.
SCHEDULE IV -- REINSURANCE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- -------- -------- -------- --------
PERCENTAGE
ASSUMED OF
CEDED TO FROM AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- -------- -------- -------- --------
Year ended December 31, 1997
Property -- Casualty Earned
Premiums........................... $48,085 $18,494 $ 7,647 $37,238 20.54%
Year ended December 31, 1996
Property -- Casualty Earned
Premiums........................... $39,311 $12,236 $ 576 $27,651 2.08%
Year ended December 31, 1995
Property -- Casualty Earned
Premiums........................... $36,005 $10,550 $ 1,507 $26,962 5.59%
See accompanying Independent Auditors' Report.
F-30