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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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO ______.
COMMISSION FILE NUMBER 0-25890
CENTURY BUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6480 ROCKSIDE WOODS BOULEVARD SOUTH, SUITE 330
CLEVELAND, OHIO 44131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (216) 447-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Name of Each Exchange on Which Registered
The Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is approximately $576,153,004 as of March 3, 1999. The number of
outstanding shares of the Registrant's common stock is 76,152,560 shares as of
March 3, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative
to the 1999 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration statements.
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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. 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 professional outsourced business services primarily to
small and medium-sized businesses, as well as individuals, governmental
entities, and not-for-profit enterprises throughout the United States.
Century offers integrated services in the following areas:
o accounting, tax, valuation, and advisory services
o benefits administration and insurance services
o human resources and payroll services
o performance consulting services
o specialty insurance
Century provides services through a network of more than 200 offices in 36
states, plus approximately 650 Century Small Business Solutions (CSBS)
franchisee offices in 47 states. As of December 31, 1998, Century served
approximately 102,000 clients, of which approximately 54,000 are serviced
through the CSBS franchisee network. Management estimates that its clients have
more than 1.4 million employees including 400,000 employed by clients of the
CSBS franchisee network.
Century was originally incorporated in Delaware in 1987 under the name Stout
Associates, Inc., and was acquired by Republic Industries, Inc. in 1992. In
April 1995, Republic spun-off its hazardous waste operations (including
Century's predecessor company) to stockholders. Re-named Republic Environmental
Systems, Inc., Century began trading on the Nasdaq National Market under the
symbol "RESI" until June 24, 1996, when it began trading under the symbol
"IASI" anticipating the merger with Century Surety Company and Commercial
Surety Agency, Inc., which resulted in a change of its name to "International
Alliance Services, Inc." This name change signaled a move away from the
hazardous waste business. Century divested of RESI and all remaining hazardous
waste operations in 1997. On December 23, 1997, Century changed its name to
Century Business Services, Inc. and began trading under the symbol "CBIZ." See
"--Liquidity and Capital Resources."
Century initiated an acquisition program in December 1996 to expand its
operations rapidly in the professional outsourced business services industry.
Since that time, Century has acquired the businesses of 107 companies, 68 of
which were acquired in 1998. The majority of these acquisitions have been
accounted for under the purchase method of accounting. During 1998, Century's
acquisitions resulted in significant increases in goodwill, and Century
anticipates that such increases will continue as a result of future
acquisitions. Goodwill was approximately $293.4 million at December 31, 1998.
Century amortizes goodwill on a straight-line basis over periods not exceeding
40 years.
From January 1, 1999 to March 4,1999, Century completed the acquisition of five
accounting, tax, valuation, and advisory service businesses. The aggregate
purchase price of these acquisitions was approximately $9.0 million, excluding
future contingent consideration of up to $1.3 million in cash and 148,549
shares of restricted common stock (estimated stock value of $1.2 million at
acquisition) based on the acquired companies ability to meet or exceed certain
performance goals. All of these transactions will be accounted for under the
purchase method of accounting. In addition the Company has entered into letters
of agreement with eight companies.
Century believes that substantial additional acquisition opportunities exist in
the professional outsourced business services industry. Century's strategy is
to grow aggressively as a diversified services company by expanding its
professional outsourced business services through internal growth and
additional acquisitions.
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Century's principal executive office is located at 6480 Rockside Woods Blvd.,
South, Suite 330, Cleveland, Ohio 44131 and its telephone number is
216-447-9000.
BUSINESS STRATEGY
Century's business strategy is to grow aggressively in the professional
outsourced business services industry. Century plans to implement its business
strategy through internal growth and by acquiring and integrating existing
businesses that provide outsourced business services.
Internal growth is anticipated primarily from:
o cross-serving Century's business services to its existing customer base
o attracting new customers with its diverse business services offering
o realizing economies of scale through the integration of its business
services
o eliminating redundant processes for maximum operating efficiency
Century recognized the need for an approach supporting the distribution of
services throughout its nationally dispersed network of business services
firms and developed an organizational framework for cross-serving. This
framework created an organizational strategy that overlays Century's service and
products. Within this organizational framework, Century has established Biz
Centers, leadership councils, and expert networks to support Century's trusted
advisors.
Integration plans are carried out through a Century integration team.
Integration team members are dispatched when a new member company is acquired
and are responsible for overseeing the integration of the new company into the
Century structure.
Century generally targets acquisitions in markets where it currently operates
and where the prospects are favorable to increase its market share to become a
significant provider of a comprehensive range of outsourced business services.
Century's strategy is to acquire selectively companies that generally:
o have a strong potential for cross-serving among Century's subsidiaries
o have strong, energetic and entrepreneurial leadership
o have healthy historic and expected future internal growth
o can add to the level and breadth of services offered by Century thereby
enhancing its competitive advantage over other outsourced business
services providers
o have a strong income and cash flow stream
Internal acquisition teams and contacts in the outsourced business services
industry help Century identify, evaluate and acquire businesses in attractive
markets. Acquisition candidates are evaluated by a comprehensive process
including operational, legal and financial due diligence reviews. As
opportunities are identified and tested against such criteria, Century may
acquire additional outsourced business providers throughout the United States.
During 1998, Century continued its strategic acquisition program, purchasing
the businesses of 68 complementary companies. These acquisitions comprise the
following:
o fifty-one accounting, tax, valuation, and advisory services companies
o fourteen benefits administration and insurance services companies
o three performance consulting services companies
The aggregate purchase price of these acquisitions was approximately $194.0
million, excluding future contingent consideration of up to $22.6 million in
cash and/or notes and 3.4 million shares of restricted common stock (estimated
stock value of $33.0 million at acquisition) based on the acquired companies'
ability to meet or exceed certain performance goals. The aggregate purchase
price, comprised of cash payments, issuances of promissory notes, and issuances
of common stock, has been allocated to Century's net assets based upon their
respective fair market values. See Note 2 to the Consolidated and Combined
Financial Statements contained herein.
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OUTSOURCED BUSINESS SERVICES
GENERAL
Through its subsidiaries, Century provides a wide range of integrated business
primarily to small and medium-sized businesses, as well as individuals,
governmental entities, and not-for-profit enterprises throughout the United
States. Century's goal is to be the nation's leading provider of outsourced
business services to its target markets. Century's strategies to achieve this
goal include:
o continuing to provide clients with a broad range of high-quality products
and services
o 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
o continuing to expand nationally through acquisitions
The following is a description of the outsourced business services currently
offered by Century.
OPERATIONS - OUTSOURCED BUSINESS SERVICES
ACCOUNTING, TAX, VALUATION, AND ADVISORY SERVICES. Century offers tax planning
and preparation, cash flow management, strategic planning, consulting services
for outsourced departments, and record-keeping assistance. In addition to
federal, state and local tax return preparation, Century provides tax
projections based on financial and investment alternatives and assists in
appropriate tax structuring of business transactions such as mergers and
acquisitions. Century also offers quarterly and year-end payroll tax reporting,
corporate, partnership and fiduciary tax planning and return preparation.
Century offers small and medium-sized businesses the opportunity to outsource
their back-office functions and many of Century's subsidiaries serve as
outsourced chief financial officers to their clients. Century also offers
financial investment analysis, succession planning, retirement planning, estate
planning, and profitability, operational and efficiency enhancement consulting
to a number of specialized industries. Century does not currently offer and
does not intend to offer audit services in the future and does not purchase the
"audit divisions" of any accounting businesses it acquires.
Century offers appraisals and valuations of commercial tangible and intangible
assets and valuations of financial securities. Century conducts real estate
valuations for financing feasibility 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
and litigation purposes. Century assists in asset allocation issues, fixed
asset insurance matters, fixed asset tracking, specialized valuation
consulting, investment transfer planning and other valuation services.
Century offers a wide range of information technology services, from creating
strategic technology plans to developing and implementing software and hardware
solutions. Specifically, CBIZ Technologies, Century's division responsible for
information technology consulting, provides strategic technology planning,
project management, development, design and implementation of both wide access
networks and local access networks, and accounting software selection and
implementation. Century utilizes a methodology in which business needs drive
technology, leading to appropriate technical solutions for Century's small and
medium-sized information technology clients.
BENEFITS ADMINISTRATION AND INSURANCE SERVICES. Century offers comprehensive
employee benefits and 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. Century
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. Century offers communications services to inform
and educate employees about their benefit programs. Century also offers
executive benefits consulting on non-qualified retirement plans and business
continuation plans. Moreover, several of Century's subsidiaries offer
Registered Investment Advisory Services, including Investment Policy Statements
(IPS), mutual fund selection based on IPS and ongoing mutual fund monitoring.
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Century entered into a strategic alliance in December 1998 to create a teamwork
approach that enables firms to meet growing consumer need for integrated
financial services. Century Retirement and Wealth Management Services, Inc., a
wholly owned subsidiary of Century, entered into a strategic national alliance
with Merrill Lynch, a financial advisory service firm. Through the agreement,
Merrill Lynch's financial products and services will be offered to Century's
national client base of small to mid-sized businesses and individuals.
Century entered into an agreement to form a strategic alliance with National
Planning Corporation, an affiliate of Jackson National Life Insurance Company,
for the development and distribution of financial and insurance products.
National Planning Corporation, a full-service securities broker-dealer, will
provide Century's large number of licensed brokers with training,
compliance/supervision, operational support and assistance in the development
and distribution of customized financial and insurance products. This alliance
will enable Century's licensed brokers to provide their clients with private
label and co-branded financial and insurance services and products.
HUMAN RESOURCES AND PAYROLL SERVICES. Century 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. Century also provides pre-employment screening, specialized systems
such as applicant skill evaluations, customer contact monitoring, and employee
assessment and selection. Century 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, Century reviews and revises, if necessary, personnel policies and
employee handbooks and creates customized handbooks for its clients.
Century processes time and attendance data to calculate and produce employee
paychecks, direct deposits and reports for its clients. Century's system is
highly configurable to meet the specialized needs of each client yet maintains
the ability to provide high-volume processing. Century's system integrates with
the client's general ledger, human resources and time attendance systems. Many
sophisticated features, including the automatic enrollment and tracking of paid
time off, pro-ration of compensation for new hires, integrated garnishment
processing, escrow services and funds administration services are available.
Century assumes responsibility for payroll and attendant record-keeping,
payroll tax deposits, payroll tax reporting and all federal, state, county 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. Century also
represents clients before tax authorities in payroll tax disputes and inquiries.
Century entered into a strategic alliance in the first quarter of 1999. In
order to expand Century's payroll services nationwide, an alliance was formed
with privately held Computing Resources, Inc., one of the largest payroll and
payroll tax processing service companies in the United States. The alliance
will provide national private label payroll processing, tax services and
customer service to Century's clients and their employees and will establish a
customer service and print/distribution center to support payroll customers in
each of Century's major markets.
PERFORMANCE CONSULTING SERVICES. Century offers assistance with the development
and implementation of strategies and programs to manage change and improve
bottom-line results. Various methods, including executive coaching,
instructional design, training delivery, and leadership development are used to
achieve these goals. Century's performance consulting services help companies
define immediate and long-term goals, pinpoint barriers to success, and
implement performance improvement processes.
OPERATIONS - SPECIALTY INSURANCE SERVICES
Century provides specialty insurance and bonding services primarily to small
and medium-sized companies throughout the United States. Century's insurance
and bonding business is focused on niche insurance and surety coverages known
as "non-standard" or specialty coverages. These terms refer to risks regarded
as higher than standard or normal risks and risk groups regarded as too small
or too specialized to permit profitable underwriting by larger, "standard
market" insurance companies. Century employs reinsurance to limit its exposure
on policies and bonds.
Century offers commercial product lines for a wide variety of specialty risk
groups, including but not limited to small construction; restaurants, bars, and
taverns; small commercial and retail establishments; and sun tanning salons.
Century's commercial product lines business is produced by a network of brokers
and agents. In late 1997, Century implemented a strategy to establish multiple
regional underwriting offices, in an effort to market and service new business
more efficiently. See "--Regulation."
Century's specialty insurance subsidiaries employ reinsurance to limit exposure
on the policies and bonds they write. Although the ceding of reinsurance does
not discharge an insurer from its primary legal liability to a policyholder,
the reinsuring company assumes the related liability. Reinsurance programs
include "treaties" that cover all business in a defined class and "facultative"
reinsurance that covers individual risks. Century generally retains from
$50,000 to $200,000 of each commercial line anticipated risk, depending on the
program. Numerous domestic and international reinsurers support these various
programs in different combinations. Generally, Century'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 $120 million
(collectively in excess of $30 billion). Cessions are diversified so that most
reinsurance treaties (excluding facultative arrangements) are supported by more
than one reinsurer and no one reinsurer participates in all of Century's
reinsurance programs.
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SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
Century's key competitive factors in obtaining clients for business services
are:
o a strong existing sales network and marketing program,
o established relationships and the ability to match client requirements
with available services and
o products at competitive prices.
Century believes that by combining a local entrepreneurial brand name with the
name and resources of a national company, it will be able to maximize its
market penetration. Century expects that as it expands through internal growth
and acquisitions, it is able to take advantage of economies of scale in
purchasing a range of services and products and cross-serving new products and
services to existing clients who do not currently utilize all of the services
Century offers.
Century intends to utilize its Century Small Business Solutions, Inc. (CSBS)
network of approximately 650 entrepreneurial franchisee sales offices to
distribute services and products to CSBS's network of approximately 54,000
customers. The franchisees can market to their customers the broad array of
services and products offered by Century. In the process, the franchisees can
enhance customer loyalty, receive compensation for additional sales and provide
additional revenue to both the Century subsidiary providing the service or
products and to CSBS, as the franchisor.
In marketing its specialty insurance services, Century attempts to identify and
exploit non-standard niches where management believes the actual risk is
significantly less than the perceived risk at which the coverage is defined and
priced, or where Century (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
Century much more flexibility than it would have as an admitted carrier,
including exemption from rate and form filing requirements that apply to
admitted carriers, and the ability to adjust prices and coverages faster than
admitted carriers. Where competitive or regulatory requirements necessitate the
use of admitted carriers, Century uses its admitted subsidiaries, thereby
reaching a market of 42 states. Century employs reinsurance arrangements to
market certain products in all 50 states.
COMPETITION
The professional outsourced business services industry is a highly fragmented
and competitive industry, with a majority of industry participants (such as
accounting, employee benefits, payroll firms or PEOs) offering only one or a
limited number of services. Competition is based primarily on customer
relationships, range and quality of services or product offerings, customer
service, timeliness and geographic proximity. Century competes with a small
number of multi-location regional or national operators and a large number of
relatively small independent operators in local markets. Century's competitors
in the professional outsourced business services industry include independent
consulting services companies, divisions of diversified enterprises, insurance
carriers and banks. Some of these competitors are public companies and some may
have greater financial resources than Century. Century also faces competition
for acquisition candidates from these companies, many of which have acquired a
number of various types of business service providers in recent years.
Century believes that it will be able to compete effectively based on its:
o broad range of high-quality services and products
o knowledgeable and trained personnel
o entrepreneurial culture
o large number of locations
o operational economies of scale
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CUSTOMERS
Century provides professional outsourced business services to approximately
102,000 clients, of which approximately 54,000 are serviced through the CSBS
franchisee network. These 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 by focusing on the
client's core business. Depending on a client's size and capabilities, it may
choose to utilize all or a portion of Century's broad array of services, which
it typically accesses through a single Century representative.
None of Century's major business services groups has a single homogeneous
client base. Rather, Century's clients come from a large variety of industries
and markets, and no one customer individually comprises more than 1% of
Century's total consolidated revenue. Management believes that such diversity
helps to insulate Century from a downturn in a particular industry. In
addition, Century's clients are focused on quality and quantity of services and
established relationships. Nevertheless, economic conditions among selected
clients and groups of clients may have a temporary impact on the demand for
such services.
REGULATION
Century's outsourced business services are vulnerable to legislative changes
with respect to provision of payroll, benefits administration and insurance
services, pension plan administration, tax, accounting, and specialty
insurance. 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
for business consulting and management services to individuals and businesses
that exist today.
Century's specialty insurance operations are vulnerable to both judicial and
legislative changes. Judicial expansion in terms of coverage can increase risk
coverage beyond levels contemplated in the underwriting and pricing process.
Coverages established by statute may be lowered or eliminated 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.
LIABILITY INSURANCE
Century carries commercial general, automobile, workers' compensation, errors
and omission, directors and officers, fiduciary, 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.
EMPLOYEES
At December 31, 1998, Century employed approximately 4,200 employees. Century
considers its relationships with its employees to be excellent.
SEASONALITY
Century's accounting and tax practice is subject to seasonality related to the
heavy volume of tax return preparation in the first four months of each year.
Century estimates that its accounting and tax practice generates approximately
35% of its revenue in the first quarter of each year.
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PROPERTIES
Century's corporate headquarters is located at 6480 Rockside Woods Blvd.,
South, Suite 330, Cleveland, Ohio 44131, in leased premises. Some of Century's
property and equipment are subject to liens securing payment of indebtedness of
Century and its subsidiaries. Century and its subsidiaries also lease
approximately 200 offices in 36 states, office equipment, and company vehicles.
Century believes that its facilities are sufficient for its needs.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Annual
Report, including without limitation, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding Century'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 those discussed below under "Risk Factors."
RISK FACTORS
The following are factors that may affect our actual operating results and
could cause results to differ materially from those in any forward-looking
statements. There may be other factors, and new risk factors may emerge in the
future. You should carefully consider the following information.
We may not be able to acquire and finance additional businesses.
We completed a significant number of acquisitions in 1998. We plan to continue
our rapid growth through acquisitions of complementary businesses. However, we
cannot be certain that we will be able to continue identifying appropriate
acquisition candidates and acquire them on satisfactory terms, if at all. We
cannot assure you that such acquisitions, even if obtained, will perform as
expected or will contribute significant revenues or profits. In addition, we
may also face increased competition for acquisition opportunities, which may
inhibit our ability to complete transactions on terms that are favorable to us.
We have traditionally financed our acquisitions by using our common stock as a
significant portion of the purchase price. However, if the value of our common
stock markedly declines, as it has in recent months, or if potential
acquisition candidates are otherwise unwilling to accept common stock as a part
of the purchase price, then we may have to use more of our cash resources, if
available, to acquire new businesses. If such cash resources are not available,
our growth through acquisitions may be limited to the extent that we are not
able to raise additional capital through debt or equity financings. Management
believes we currently have funds available under our bank line of credit to
fund our working capital and acquisition needs, we cannot be certain that we
will be able to maintain this line of credit, access the public securities
markets or obtain other financing for acquisitions.
We may not be able to adequately manage our growth.
Our business has grown significantly in size and complexity. Our continued
growth depends to a significant degree on our ability to successfully use our
existing infrastructure to perform services for other clients, as well as on
our ability to develop and successfully implement new marketing methods or
channels for new services. Our continued growth also depends on a number of
other factors, including our ability to:
o maintain the high quality of the services that we provide to our
customers;
o increase the number of services provided to our existing customers;
o recruit, motivate and retain qualified personnel; and
o economically train existing sales representatives or recruit new sales
representatives.
Our continued rapid growth will also require the implementation of enhanced
operational and financial systems. We cannot assure you that we will be able to
manage our expanding operations effectively or that we will be able to maintain
our rapid growth.
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We are dependent on the current trend of outsourcing business services.
Our business and growth depend in large part on the trend toward outsourcing of
business services. We can give you no assurance that this trend in outsourcing
will continue. Current and potential customers may elect to perform such
services with their own employees. A significant reversal of, or a decline in,
this trend could have a material adverse effect on our business.
We are dependent on the services of Michael DeGroote and other key employees.
Our success depends in large part upon the abilities and continued service of
our executive officers and other key employees, particularly Michael G.
DeGroote, our Chairman, Chief Executive Officer and President. We cannot assure
you that we will be able to retain the services of our officers and employees.
If we cannot retain the services of Mr. DeGroote or other key personnel, there
could be a material adverse effect on our business. We generally have
employment agreements and non-competition agreements with key personnel.
Courts, however, are at times reluctant to enforce such non-competition
agreements. In addition, many of our executive officers and other key personnel
are either participants in our stock option plan or holders of a significant
amount of our common stock. We believe that these interests provide additional
incentives for these key employees to remain with us. In order to support our
rapid growth, we will need to effectively recruit, hire, train and retain
additional qualified management personnel. Our inability to attract and retain
necessary personnel could have a material adverse effect on our business,
financial condition and results of operations.
We may not realize the full value of our goodwill.
Recent acquisitions have increased the amount of goodwill on our financial
statements. Goodwill is the excess of the cost over the fair value of the net
identifiable assets of the businesses that we have acquired. We anticipate that
such increases will continue as a result of future acquisitions. At December
31, 1998, goodwill was approximately $293.4 million. In our financial
statements, we amortize goodwill on a straight-line basis over periods not
exceeding 40 years. We may not realize the full value of our goodwill. Any
future determination requiring a write-off of a significant portion of goodwill
could have a material adverse effect on our business, financial condition and
results of operations.
We could be held liable for errors and omissions.
All of our professional business services entail an inherent risk of
professional malpractice and other similar claims. Therefore, we maintain
errors and omissions insurance coverage. Although we believe that our insurance
coverage is adequate, we cannot be certain that actual future claims would not
exceed the coverage amounts. If we have a large claim on our insurance, the
rates for such insurance may increase, but contractual arrangements with
clients may constrain our ability to incorporate such increases into service
fees. Such insurance rate increases, as well as any underlying malpractice
claim, could have a material adverse effect on our business, financial
condition and results of operations.
The outsourcing industry is competitive and fragmented.
We face competition from a number of sources in both the outsourced business
services industry and the specialty insurance industry. Competition in both
industries has led to consolidation of many large companies that may have
greater financial, technical, marketing and other resources than us. In
addition to these new large companies, we face competition in the outsourced
business services industry from in-house employee services departments, local
outsourcing companies and independent consultants, as well as new entrants into
our markets. We cannot assure you that, as our industry continues to evolve,
additional competitors will not enter the industry or that our clients will not
choose to conduct more of their business services internally or through
alternative business services providers. Although we intend to monitor industry
trends and respond accordingly, we cannot assure you that we will be able to
anticipate and successfully respond to such trends in a timely manner. We
cannot be certain that we will be able to compete successfully against current
and future competitors, or that competitive pressure will not have a adverse
effect on our business, financial conditions and results of operations.
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Year 2000 noncompliance may cause operational problems.
The Year 2000 (Y2K) compliance problem is the result of computer programs
designed to use two digit rather than four digit years. Thus, the year 1999 is
represented as 99 and the year 2000 would be represented as 00. The latter
could be interpreted as either 1900 or 2000. To systems that have Y2K related
issues, the time may seem to have reverted back 100 years. Systems, equipment
and software with exposure to Y2K related problems exist not only in
computerized information systems but also in building operating systems such as
elevators, alarm systems, energy management systems, phone systems, and
numerous other systems and equipment.
We are currently assessing our systems and equipment and modifying them as
necessary to address the Y2K issues. We expect to incur $2 to $3 million in
capital expenditures in 1999 with respect to system upgrades which are designed
in part to address specific Y2K requirements. We do not expect expenditures
incurred after 1999 for the Y2K compliance to be material. However, if we
acquire additional companies, we will need to evaluate how the Y2K issue will
impact them. If such expenditures exceed expectations or if a future
acquisition requires substantial expenditures to address its Y2K issues, this
could adversely affect our financial results. We cannot assure you that our
systems or the systems of other companies on which our systems rely will be
timely installed or converted. Although we are not certain of the impact on us
of the failure of our significant customers or vendors to achieve Y2K
compliance in a timely or effective manner, such failure could materially
adversely affect our business and results of operations.
Our business depends, in part, upon our ability to store, retrieve, process and
manage significant databases and periodically, to expand and upgrade our
ability to process information. We primarily use personal computers and laptops
connected to a local area network for its information processing. Interruption
or loss of our information processing capabilities through loss of stored data,
security breach, breakdown or malfunction of computer equipment or software
systems, telecommunications failure, conversion difficulties or damage to our
computer equipment or software systems could have a material adverse effect on
our business, financial condition and results of operations. See "Management' s
Discussion and Analysis of Financial Conditions and Results of Operations -
Year 2000 Compliance Project".
The following are risks associated with our insurance services.
THE INSURANCE PREMIUMS THAT WE CHARGE MAY BE INADEQUATE. When we set the
premiums for our insurance policies, we look at the premiums we have set in the
past and whether those premiums were adequate to cover our losses. There is
always the risk, however, that we may not set the premiums for insurance high
enough to cover all of our losses. A loss that is larger than the amount that
we receive from premiums would have a material adverse effect on our business,
financial condition and results of operations.
WE MAY UNDERESTIMATE RESERVES. When we decide the amount of reserves necessary
to cover our insurance losses, we use past experience to estimate the losses to
be covered in a given year. In addition, our outside actuaries review our
estimates quarterly. In recent years, these actuaries have stated that our
estimates were accurate. We cannot be sure, however, that such estimates, $61
million as of December 31, 1998, will be enough to cover our ultimate insurance
liability. If these estimates are inadequate, we could suffer losses that would
have a material adverse effect on our business, financial condition and results
of operations.
OUR REINSURERS COULD FAIL. After we issue an insurance policy, we take out
insurance from a reinsurer against any losses we might suffer under such
policy. We depend heavily on reinsurers. If one or more reinsurers fail, we
will have to cover any losses that would have been covered by them. Therefore,
a failure of one or more of our reinsurers could have a material adverse effect
on our business, financial condition and results of operations. Even if all our
reinsurers remain solvent, we can only estimate how much reinsurance we need.
We base our assumptions about the amount of reinsurance we need on past
experience. If we underestimate how much reinsurance we need, we will suffer
losses. These losses would have a material adverse effect on our business,
financial condition and results of operations.
Governmental regulations and interpretations are subject to changes.
We are affected by changes in the law in two primary ways. First, changes in
the law often result in changes in the amount or the type of business services
required by businesses and individuals. We cannot be sure that future laws will
provide the same or similar opportunities for us to provide business consulting
and management services businesses and individuals. Second, our specialty
insurance business is affected by changes to surety bond coverage requirements.
For instance, if the demand for surety bonds decreases, there could be a
adverse effect on our business, financial condition and results of operations.
11
<PAGE> 11
We could experience investment losses.
Our solvency and profitability are maintained, in part, by investing our
insurance-related assets. In order to minimize the risk of loss in any one
investment, we do the following:
o invest primarily in debt instruments of government agencies and corporate
entities with quality ratings of B or better;
o invest in a range of investments;
o have an investment committee that oversees all investments; and
o employ professional investment advisors who provide general investment
advice as well as advice on individual investments.
Despite these measures, we cannot assure you that we will not have any losses
on our investments. A series of losses in our investment portfolio could have a
material adverse effect on our business, financial condition and results of
operations.
Our principal shareholders have substantial control over our operations.
As of March 3, 1999, the following groups owned the following aggregate amounts
and percentages of our common stock, including shares that may be acquired by
exercising options or warrants:
o approximately 15.6 million shares, representing 20.5% of all our
outstanding common stock, was owned by Mr. DeGroote, Chairman, Chief
Executive Officer and President
o approximately 7.6 million shares, representing 10% of all our outstanding
common stock, was owned by Mr. Huizenga, a principal shareholder
o approximately 24.5 million shares, representing 32.3% of all our
outstanding common stock, were owned by our executive officers, directors,
and Mr. Huizenga
Because of their stock ownership, these persons can substantially influence
actions that require the consent of a majority of our outstanding shares,
including the election of directors.
We have shares eligible for future sale that could adversely affect the price
of our common stock.
Future sales or issuance of common stock, or the perception that sales could
occur, could adversely affect the market price of our common stock and dilute
the percentage ownership held by our stockholders. We cannot be sure when sales
will occur, how many shares will be sold, or the effect that sales may have on
the market price of our common stock. As of March 3, 1999, we have registered
under the Securities Act the following shares of common stock for the following
purposes:
o 37,953,889 shares of which approximately 34.4 million shares remain for
resale from time to time by selling shareholders under various shelf
registration statements;
o $125 million in shares of our common stock, debt securities, and warrants
to purchase common stock or debt securities, to be offered from time to
time by us to the public under our universal shelf registration statement;
and
o 7,729,468 shares, of which 3,937,495 remain, to be offered from time to
time by us in connection with acquisitions under our acquisition shelf
registration statement.
We may not pay dividends.
We have not paid cash dividends on our common stock since April 27, 1995, and
we do not anticipate paying cash dividends in the foreseeable future. Our Board
of Directors decides on the payment and level of dividends on common stock. The
Board's decision is based on our results of operations and financial condition
among other things. In addition, our credit facility contains restrictions on
our ability to pay dividends. We currently intend to retain future earnings to
finance the ongoing operations and growth of the business.
12
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
GENERAL
Periodically, Century and its subsidiaries are parties to lawsuits, which have
arisen in the ordinary course of business. Although it is possible that losses
exceeding amounts already recorded may be incurred upon ultimate resolution of
these existing legal proceeding, management believes that such losses, if any,
will not have a material adverse effect on Century's business, results of
operations or financial position; however, unfavorable resolution of each
matter individually or in the aggregate could affect the consolidated results
of operations for the quarterly periods in which they are resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Century's shareholders during the fourth
quarter of the fiscal year covered by this Annual Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of Century 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. The following prices are adjusted for
Century's July 1996 two for one stock split.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
-----------------------
HIGH LOW
---- ---
<S> <C> <C>
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
1998
First Quarter............................................... $18.25 $13.94
Second Quarter.............................................. 20.19 16.38
Third Quarter............................................... 25.38 17.50
Fourth Quarter ............................................. 20.38 8.88
</TABLE>
On December 31, 1998, the last reported sale price of Century's common stock as
reported on the Nasdaq National Market (Nasdaq Amex-Online) was $14.38 per
share. As of February 2, 1999, Century had 10,090 holders of record of its
common stock.
13
<PAGE> 13
DIVIDEND POLICY
Century has not paid cash dividends on its common stock since April 27, 1995,
and does not anticipate paying cash dividends in the foreseeable future.
Century's board of directors decides on the payment and level of dividends on
common stock. The board's decision is based on results of operations and
financial condition among other things. In addition, Century's credit facility
contains restrictions on its ability to pay dividends. Century currently
intends to retain future earnings to finance the ongoing operations and growth
of the business. Any future determination as to dividend policy will be made at
the discretion of the board of directors and will depend on a number of
factors, including future earnings, capital requirements, financial condition
and future prospects, restrictions on dividend payments pursuant to credit or
other agreements and such other factors as the board of directors may deem
relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for Century and
is 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 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. This
information has been restated for business combinations accounted for as
pooling-of-interests as if such combined companies had operated as one entity
since inception.
14
<PAGE> 14
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF INCOME DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Business services fees and commissions ...... $ 297,520 $ 126,304 $ 56,057 $ 50,523 $ 44,284
Specialty insurance services (regulated):
Premiums earned ........................... 44,896 37,238 27,651 26,962 23,368
Net investment income ..................... 5,381 4,524 3,564 3,341 2,477
Net realized gains on investments ......... 3,001 3,044 1,529 166 80
Other income, net ......................... 1,230 13 1,419 470 1,385
--------- --------- --------- --------- ---------
Total revenues ........................ 352,028 171,123 90,220 81,462 71,594
Expenses:
Operating expenses - business services ..... 229,345 107,677 51,988 44,846 39,633
Loss and loss adjustment expenses .......... 23,714 20,682 17,624 15,117 12,494
Policy acquisition expenses ................ 14,932 9,670 7,699 7,774 5,428
General and administrative expenses ........ 6,119 4,162 302 -- --
Depreciation and amortization expenses ..... 10,575 3,401 1,028 744 925
Merger and acquisition costs ............... 3,572 416 -- -- --
Interest income, net ....................... (800) (1,250) (220) (44) (48)
Other expenses, net ........................ 3,900 2,331 2,655 3,157 4,544
--------- --------- --------- --------- ---------
Total expenses .......................... 291,357 147,089 81,076 71,594 62,976
Income from continuing operations
before income tax expense ................... 60,671 24,034 9,144 9,868 8,618
Income tax expense ............................ 21,234 6,543 2,003 1,777 1,835
--------- --------- --------- --------- ---------
Income from continuing operations ............. 39,437 17,491 7,141 8,091 6,783
Loss from discontinued business ............... -- (663) (38) -- --
Loss on disposal of discontinued business ..... -- (572) -- -- --
--------- --------- --------- --------- ---------
Net income .................................... $ 39,437 $ 16,256 $ 7,103 $ 8,091 $ 6,783
========= ========= ========= ========= =========
Weighted average common shares ................ 61,129 42,776 23,699 20,596 20,596
Weighted average common shares and
dilutive potential common shares ......... 74,333 54,740 29,868 22,792 22,792
Earnings per share:
Basic ....................................... $ 0.65 $ 0.38 $ 0.30 $ 0.39 $ 0.33
========= ========= ========= ========= =========
Diluted ..................................... $ 0.53 $ 0.30 $ 0.24 $ 0.35 $ 0.30
========= ========= ========= ========= =========
OTHER DATA
EBITDA(1) ..................................... $ 70,446 $ 26,185 $ 9,952 $ 10,568 $ 9,495
Gross written premiums ........................ $ 82,933 $ 59,751 $ 42,888 $ 37,695 $ 37,869
Net written premium ........................... $ 48,097 $ 37,488 $ 31,149 $ 26,677 $ 27,219
Loss ratio .................................... 36.2% 34.3% 41.3% 39.2% 37.9%
LAE ratio ..................................... 16.6% 21.2% 22.5% 16.9% 15.6%
Expense ratio ................................. 45.4% 32.2% 38.0% 39.9% 43.5%
--------- --------- --------- --------- ---------
Combined ratio ................................ 98.2% 87.7% 101.8% 96.0% 97.0%
========= ========= ========= ========= =========
Invested assets and cash ...................... $ 137,974 $ 109,341 $ 117,089 $ 69,374 $ 64,409
Goodwill, net of accumulated amortization ..... $ 293,374 $ 89,856 $ 6,048 -- --
Total assets .................................. $ 648,677 $ 316,617 $ 194,743 $ 113,354 $ 106,372
Losses and loss expenses payable .............. $ 60,994 $ 50,655 $ 41,099 $ 37,002 $ 34,661
Total liabilities ............................. $ 252,815 $ 159,194 $ 95,377 $ 79,124 $ 77,708
Total shareholders' equity .................... $ 395,862 $ 157,423 $ 99,367 $ 34,230 $ 28,664
</TABLE>
(1) Earnings from continuing operations before interest, taxes, depreciation
and amortization
15
<PAGE> 15
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
Century's financial position and results of operations for each of the years
ended December 31, 1998, 1997 and 1996. This discussion should be read in
conjunction with Century's consolidated and combined financial statements and
notes thereto included herein. During fiscal 1998, Century continued its
strategic acquisition program, purchasing the businesses of 68 complementary
companies. Forty-eight of these acquisitions were accounted for under the
purchase accounting method, 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. Twenty of these
acquisitions were accounted for under the pooling-of-interests method of
accounting, and accordingly, all periods presented have been restated to
include the operating results of such acquired companies. The results of
operations related to Century'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, 1998 TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased to $352.0 million for the year ended December 31, 1998
from $171.1 million for the comparable period in 1997, representing an increase
of $180.9 million, or 105.7%. The increase was primarily attributable to
Century's acquisition activity in outsourced services and internal growth.
Business service fees and commissions increased to $297.5 million for the year
ended December 31, 1998 from $126.3 million for the comparable period in 1997,
representing an increase of $171.2 million, or 135.6%. The increase was
primarily attributable to the acquisitions completed in 1998 and internal
growth. Because the majority of Century's acquisitions were accounted for under
the purchase method, Century's consolidated and combined financial statements
give effect to such acquisitions only after their effective acquisition dates.
Premiums earned increased to $44.9 million for the year ended December 31, 1998
from $37.2 million for the comparable period in 1997, representing an increase
of $7.7 million, or 20.6%. Gross written premiums increased to $82.9 million
for the year ended December 31, 1998 from $59.8 million for the comparable
period in 1997, representing an increase of $23.2 million, or 38.8%. Net
written premiums increased to $48.1 million for the year ended December 31,
1998 compared to $37.5 million for the comparable period in 1997, representing
an increase of $10.6 million, or 28.3%. These increases were primarily
attributable to the full year impact of the regionalization efforts implemented
in late 1997. See "Operations - Specialty Insurance."
Net investment income increased to $5.4 million for the year ended December
31, 1998 from $4.5 million for the comparable period in 1997, representing an
increase of $0.9 million, or 18.9%. This increase was attributable to an
increase in the annualized return on investments to approximately 6.0% for the
year ended December 31, 1998 from 5.7% for the comparable period in 1997 and to
an increase in the average investments outstanding to $84.0 million for the year
ended December 31, 1998 from $74.2 million for the comparable period in 1997.
Net realized gain on investments remained stable at $3.0 million for the year
ended December 31, 1998 compared to $3.0 million for the comparable period in
1997.
EXPENSES
Total expenses increased to $291.4 million for the year ended December 31, 1998
from $147.1 million for the comparable period in 1997, representing an increase
of $144.3 million, or 98.1%. Such increase was primarily attributable to the
increase in operating expenses, which reflects the impact of Century's
acquisitions made in 1998 and the increase of corporate executive staff and
related integration costs. As a percentage of revenues, total expenses
decreased to 82.8% for the year ended December 31, 1998 from 86.0% for the
comparable period of 1997.
Operating expenses for the business services operations increased to $229.3
million for the year ended December 31, 1998 from $107.7 million for the
comparable period in 1997, representing an increase of $121.7 million, or
113.0%. Such increase was primarily attributable to business services
acquisitions completed in 1998. As a percentage of fees and commissions,
operating expenses decreased to 77.1% for the year ended December 31, 1998 from
85.3% for the comparable period in 1997. This decrease was attributed to cost
savings achieved through integration and consolidation of earlier acquisitions,
partially offset by the initial integration costs incurred by the newly
acquired subsidiaries.
16
<PAGE> 16
Loss and loss adjustment expenses increased to $23.7 million for the year ended
December 31, 1998 from $20.7 million for the comparable period in 1997,
representing an increase of $3.0 million, or 14.7%. 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
52.8% for the year ended December 31, 1998 from 55.5% for the comparable period
in 1997. Such decrease was the result of lower actuarial estimates of ultimate
losses in prior accident years.
Policy acquisition expenses increased to $14.9 million for the year ended
December 31, 1998 from $9.7 million for the comparable period in 1997,
representing an increase of $5.2 million, or 54.4%. The increase corresponds to
the full year impact of regionalized operations. As a percentage of premiums
earned, policy acquisition expenses were 33.3% and 26.0% for the year ended
December 31, 1998 and 1997.
General and administrative expenses increased to $6.1 million for the year
ended December 31, 1998 from $4.2 million for the comparable period in 1997,
representing an increase of $1.9 million, or 47.0%. Such increase was
attributable to growth of the corporate office expansion to support Century's
infrastructure, corporate initiatives, and integration costsi. General and
administrative expenses represented 1.7% of total revenues for the year ended
December 31, 1998, compared to 2.4% for the comparable period in 1997.
Depreciation and amortization expense increased to $10.6 million for the year
ended December 31, 1998 from $3.4 million for the comparable period in 1997,
representing an increase of $7.2 million, or 210.9%. The increase is a result
of the increase of goodwill amortization, and depreciation expense, resulting
from the 48 acquisitions completed by Century in 1998, as well as 38
acquisitions in 1997, accounted for under the purchase method of accounting. As
a percentage of total revenues, depreciation and amortization expense increased
to 3.0% for the year ended December 31, 1998 from 2.0% for the comparable
period in 1997.
Merger and acquisition costs increased to $3.6 million in 1998 from $416,000 in
1997, primarily due to the higher volume of acquisitions in 1998. Merger and
acquisition costs are comprised primarily of salaries of employees dedicated to
merger activities and professional fees incurred in transactions accounted for
as pooling-of-interests.
Net interest income decreased to $800,000 for the year ended December 31, 1998
from $1.3 million for the comparable period in 1997. Such decrease was
attributable to an increase in interest expense in 1998 to $2.4 million which
is due to higher debt carried in 1998 from both Century's revolving credit
facility, and debt acquired in connection with 1998 acquisitions.
Other expenses, net increased to $3.9 million for the year ended December 31,
1998 from $2.3 million for the comparable period in 1997, representing an
increase of approximately $1.6 million, or 67.3%. Such increase was
attributable to and increase in non acquisition expenses related to specialty
insurance, mitigated by the $1.5 million gain on the sale of M&N Risk
Management, Inc. and M&N Enterprises, Inc.
The Company recorded income taxes from continuing operations of $21.2 million
($22.1 million on a pro forma basis) for the year ended December 31, 1998 and
$6.5 million ($8.0 million on a pro forma basis) for the comparable period in
1997. The effective income tax rate from continuing operations increased to 35%
(36.5% on a pro forma basis) from 27.2% (33.4% on a pro forma basis) for the
comparable period in 1997. Such increase was primarily attributable to the
shift from specialty insurance services to outsourced business services.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased to $171.1 million for the year ended December 31, 1997
from $90.2 million for the comparable period in 1996, representing an increase
of $80.9 million, or 89.7%. The increase was primarily attributable to
Century's acquisition activity in outsourced services, as well as internal
growth for existing business services companies and internal growth for
specialty insurance businesses.
Business service fees and commissions increased to $126.3 million for the year
ended December 31, 1997 from $56.1 million for the comparable period in 1996,
representing an increase of $70.2 million, or 125.3%. The increase was
primarily attributable to the acquisitions completed in 1997. All of the 1997
acquisitions, except for one, were accounted for under the purchase method.
Century's consolidated and combined financial statements give effect to such
acquisitions only after their respective acquisition dates.
Premiums earned increased to $37.2 million for the year ended December 31, 1997
from $27.7 million for the comparable period in 1996, representing an increase
of $9.6 million, or 34.7%. Gross written premiums increased to $59.8 million
for the year ended December 31, 1997 from $42.9 million for the comparable
period 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 for the comparable period in 1996, representing
an increase of $6.3 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.
17
<PAGE> 17
Net investment income increased to $4.5 million for the year ended December 31,
1997 from $3.6 million for the comparable period 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% for the comparable period 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 for the comparable period in 1996.
Net realized gain on investments increased to $3 million for the year ended
December 31, 1997 from $1.5 million for the comparable period in 1996. This
increase was primarily due to increased sales of equity securities.
EXPENSES
Total expenses increased to $147.1 million for the year ended December 31, 1997
from $81.1 million for the comparable period in 1996, representing an increase
of $66.0 million, or 81.4%. Such increase was primarily attributable to the
increase in operating expenses, which reflects the impact of Century's
acquisitions made in 1997 and the corresponding increase of corporate staff and
related integration costs. As a percentage of revenues, total expenses
decreased to 86.0% for the year ended December 31, 1997 from 89.9% for the
comparable period of 1996.
Operating expenses for the business services operations increased to $107.7
million for the year ended December 31, 1997 from $52.0 million for the
comparable period in 1996, representing an increase of $55.7 million, or
107.1%. Such increase was attributable to business services acquisitions
completed in 1997. As a percentage of fees and commissions, operating expenses
decreased to 85.3% for the year ended December 31, 1997 from 92.7% for the
comparable period in 1996.
Loss and loss adjustment expenses increased to $20.7 million for the year ended
December 31, 1997 from $17.6 million for the comparable period 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% for the comparable period
in 1996. Such decrease was the result of normal development in 1997, compared to
higher than normal development in 1996.
Policy acquisition expenses increased to $9.7 million for the year ended
December 31, 1997 from $7.7 million for the comparable period 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 premiums earned,
policy acquisition expenses were 26.0% and 27.8% for the year ended December
31, 1997 and 1996.
General and administrative expenses increased to $4.2 million for the year
ended December 31, 1997 from $302,000 for the comparable period in 1996, an
increase of $3.9 million. 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. General and administrative expenses represented 2.4% of
total revenues for the year ended December 31, 1997.
Depreciation and amortization expense increased to $3.4 million for the year
ended December 31, 1997 from $1.0 million for the comparable period in 1996,
representing an increase of $2.4 million, or 230.8%. The increase is a result
of the increase of goodwill amortization resulting from the 38 acquisitions
completed during 1997 accounted for under the purchase method. As a percentage
of total revenues, depreciation and amortization expense increased to 2.0% for
the year ended December 31, 1997 from 1.1% for the comparable period in 1996.
Such increase was attributable to the implementation of Century's acquisition
strategy.
Net interest income increased to $1.3 million for the year ended December 31,
1997 from $220,000 for the comparable period in 1996. Such increase was
attributable to the increase in cash and cash equivalent balances for Century's
non-insurance entities acquired or established after December 31, 1996.
Other expenses decreased to $2.3 million for the year ended December 31, 1997
from $2.7 million for the comparable period in 1996, representing a decrease of
approximately $324,000. 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.
The Company recorded income taxes from continuing operations of $6.5 million
($8.0 million on a pro forma basis) for the year ended December 31, 1997 and
$2.0 million ($3.0 million on a pro forma basis) for the comparable period in
1996. The effective income tax rate from continuing operations increased to
27.2% (33.4% on a pro forma basis) for the year ended December 31, 1997 from
21.9% (32.3% on a pro forma basis) for the comparable period in 1996. Such
increase was primarily attributable to the shift from specialty insurance
services to outsourced business services.
18
<PAGE> 18
COMBINED AND OPERATING RATIOS (SPECIALTY INSURANCE)
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 operating ratios of Century on a generally accepted accounting principles
(GAAP) basis for each of the years ended December 31 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loss ratio.................................................... 36.2% 34.3 41.3
LAE ratio..................................................... 16.6% 21.2 22.5
Expense ratio................................................. 45.4% 32.2 38.0
----- ----- -----
Combined ratio................................................ 98.2% 87.7 101.8
Net investment ratio.......................................... (12.0%) (12.2) (12.9)
Operating ratio............................................... 86.2% 75.5 88.9
</TABLE>
EXPENSES
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net written premiums on a GAAP basis. The statutory ratio
differs from the GAAP ratio as a result of different treatment of acquisition
costs. Expense ratios have been unfavorably impacted in 1998 and favorably
impacted in 1997 by reinsurance contingencies.
LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLE
As of December 31, 1998, the liability for losses and LAE constituted 24% 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
and subrogation.
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. See Note 6 to the Consolidated
and Combined Financial Statements contained herein.
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 exists. 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.
19
<PAGE> 19
ANALYSIS OF LOSS AND LAE DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for losses and
loss expenses ........... 7,202 8,168 10,428 12,775 14,107 21,023 25,278 28,088 32,985 42,399 44,556
Cumulative amount of net
Liability paid through:
One year later .......... 2,985 2,404 2,404 2,811 3,026 4,131 6,309 8,785 8,773 13,639
Two years later ......... 3,876 3,433 4,090 4,894 3,848 7,503 11,161 14,452 16,798
Three years later ....... 4,398 4,322 5,239 5,372 4,786 9,346 13,910 18,874
Four years later ........ 4,799 4,984 5,184 6,010 5,119 10,594 15,745
Five years later ........ 5,140 4,880 5,352 6,102 5,572 11,415
Six years later ......... 5,147 4,953 5,352 6,217 5,586
Seven years later ....... 5,152 4,947 5,391 6,229
Eight years later ....... 5,135 4,969 5,403
Nine years later ........ 5,153 4,971
Ten years later ......... 5,150
The retroactively
Reestimated net liability
for loss and loss
expenses as of:
One year later .......... 7,406 8,388 10,674 12,003 12,587 18,910 23,049 28,246 31,803 39,369
Two years later ......... 7,445 8,504 9,239 10,877 9,829 17,531 22,193 27,033 28,983
Three years later ....... 7,419 7,025 8,183 8,419 8,899 16,174 20,660 24,608
Four years later ........ 6,365 6,668 6,631 8,675 7,822 14,775 19,046
Five years later ........ 6,311 5,638 6,320 7,467 6,766 13,099
Six years later ......... 5,534 5,243 5,823 6,704 5,973
Seven years later ....... 5,308 5,133 5,557 6,352
Eight years later ....... 5,230 4,992 5,450
Nine years later ........ 5,163 4,982
Ten years later ......... 5,156
----- ----- ------ ------ ------ ------ ------ ------ ------ ------
Net cumulative redundancy .. 2,046 3,186 4,978 6,423 8,134 7,924 6,232 3,480 4,002 3,030
===== ===== ====== ====== ====== ====== ====== ====== ====== ======
Gross liability - end of
year...................... $34,661 $37,002 $41,099 $50,655 $60,994
Reinsurance recoverable .... 9,383 8,914 8,114 8,256 16,438
------- ------- ------- ------- -------
Net liability - end of year $25,278 $28,088 $32,985 $42,399 $44,556
======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
Century had cash and investments, excluding mortgage loans, of $137.2 million
and $107.5 million at December 31, 1998 and 1997, respectively.
Net cash provided by operations for the years ended December 31, 1998, 1997,
and 1996 was $30.8 million, $9.3 million, and $15.6 million, respectively.
These amounts were adequate to meet the majority of Century's capital
expenditures, operating and acquisition costs and resulted primarily from
earnings and the timing of reinsurance contingency transactions.
Century's financing activities provided net cash for the years ended December
31, 1998, 1997 and 1996 of $80.2 million, $11.5 million, and $33.9 million,
respectively. During 1998, Century realized approximately $83.8 million in cash
proceeds from a private placement and from stock issuances, offset somewhat by
debt repayments on outstanding credit obligations used for operating and
acquisition purposes and the effect of pre-merger distributions to companies
acquired under the pooling-of-interests accounting method.
20
<PAGE> 20
During 1997, Century realized approximately $8.4 million in cash proceeds from
a private placement and from stock issuances and $6.8 million on a net basis
from financing sources. These proceeds were primarily used to fund its
acquisition program as well as to fund the investment activities of Century's
specialty insurance subsidiaries, offset by Century's disposition of its
environmental systems operations.
During 1996, Century realized approximately $38.2 million in cash proceeds from
a private placement and from stock issuances. Century used $1.8 million of
these proceeds to repay debt obligations arising from the merger transaction
with RESI and Century Surety Company and Commercial Surety Agency, Inc., $9.9
million to fund the investment activities for the specialty insurance
subsidiaries and $4.0 million to purchase companies that complement its
acquisition strategy and $1.1 million to purchase general office equipment.
SOURCES OF CASH
Century'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 accounting, tax, valuation and advisory services,
benefits administration and insurance services, human resources and payroll
services and performance consulting services.
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 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 by an insurance subsidiary to its
parent. 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.
Century's primary line of credit is a $100 million revolving credit facility
with several financial institutions, of which approximately $44,000,000 was
outstanding at December 31, 1998. The interest rate under the credit facility
is, at Century's option, either:
(a) the higher of 0.50% per annum above the latest Federal Funds Rate or
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: observance of various
financial and other covenants; restrictions on additional indebtedness;
restrictions on dividend payments and; restrictions on certain liens,
mergers, dispositions of assets and investments.
Under its revolving credit facility, Century must also maintain a net worth
equal to the sum of: $221 million plus; 70% of subsequent net income plus; the
proceeds of any equity security offerings.
In February 1998, Century completed a private placement in which it sold an
aggregate of 3,800,000 shares to qualified investors at an aggregate purchase
price of $13.25 per share and realized $47.7 million in proceeds.
In April 1997, the Company completed a private placement in which the Company
sold an aggregate of 616,611 units to qualified investors at an aggregate
purchase price of $9.00 per unit. Each 1997 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 $5.3
million.
21
<PAGE> 21
In December 1996, Century issued and sold 3,251,888 units of Century for $9.00
per unit. Each 1996 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. Century realized net proceeds of approximately $27.6 million.
Under the Securities Act Century registered 7,729,468 shares to be issued in
connection with acquisitions and $125 million in debt, warrants and common
stock. To date, Century has issued 3,791,973 shares in connection with
acquisitions and expects to issue $25 million common stock and warrants,
leaving 3,937,495 and $100 million available for future use.
USES OF CASH AND LIQUIDITY OUTLOOK
OPERATIONS. Century's capital expenditures from continuing operations totaled
$12.3 million, $3.0 million and $1.2 million for the years ended December 31,
1998, 1997 and 1996, respectively, which included expenditures for fixed assets
for normal replacement, compliance with regulations and market development.
During the year ended December 31, 1998, Century primarily funded capital
expenditures from cash on hand and operating cash flow. Century anticipates
that during 1999, 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. 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
Cash used in investing activities for the years ended December 31, 1998, 1997
and 1996 primarily was the result of purchases and sales of investments and
acquisitions.
Century is required to establish a reserve for unearned premiums. Century's
principal costs and factors in determining the level of profit is 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.
On February 26, 1999, Century entered into a contract with a national software
provider to purchase an enterprise wide solution to integrate back office
operations. The cost of the software is approximately $4 million, which
includes licensing costs, maintenance and education. Additional consulting
services to implement the enterprise wide solution are currently being
negotiated.
YEAR 2000 COMPLIANCE PROJECT
The Year 2000 (Y2K) compliance problem is the result of computer programs
designed to use two digit rather than four digit years. Thus, the year 1999 is
represented as 99 and the year 2000 would be represented as 00. The latter
could be interpreted as either 1900 or 2000. To systems that have Y2K related
issues, the time may seem to have reverted back 100 years. Systems, equipment
and software with exposure to Y2K related problems exist not only in
computerized information systems but also in building operating systems such as
elevators, alarm systems, energy management systems, phone systems, and
numerous other systems and equipment.
We are currently assessing our systems and equipment and modifying them as
necessary to address the Y2K issues. We expect to incur $2 to $3 million in
capital expenditures in 1999 with respect to system upgrades which are designed
in part to address specific Y2K requirements. We do not expect expenditures
incurred after 1999 for the Y2K compliance to be material. However, if we
acquire additional companies, we will need to evaluate how the Y2K issue will
impact them. If such expenditures exceed expectations or if a future
acquisition requires substantial expenditures to address its Y2K issues, this
could adversely affect our financial results. We cannot assure you that our
systems or the systems of other companies on which our systems rely will be
timely installed or converted. Although we are not certain of the impact on us
of the failure of our significant customers or vendors to achieve Y2K
compliance in a timely or effective manner, such failure could materially
adversely affect our business and results of operations.
Our business depends, in part, upon our ability to store, retrieve, process and
manage significant databases and periodically, to expand and upgrade our
ability to process information. We primarily use personal computers and laptops
connected to a local area network for its information processing. Interruption
or loss of our information processing capabilities through loss of stored data,
security breach, breakdown or malfunction of computer equipment or software
systems, telecommunications failure, conversion difficulties or damage to our
computer equipment or software systems could have a material adverse effect on
our business, financial condition and results of operations.
22
<PAGE> 22
To minimize or eliminate the effect of the Y2K risk on our business systems and
applications, we are continually identifying, evaluating, implementing and
testing our computer systems, applications and software in order to achieve Y2K
compliance. We implemented a Y2K Compliance Project in March 1998 that has been
adopted by all of our subsidiaries. As part of this initiative, we have
identified key contact individuals within each subsidiary to identify, evaluate
and implement a plan to bring all of our business systems and applications into
Y2K compliance by June 30, 1999. Century's Y2K Compliance Project consists of
four phases: (i) inventory and assessment of all business systems and
applications subject to Y2K risk; (ii) identification of such business systems
and applications to determine the method of correcting any Y2K problems (ready
now, repair, reconcile, replace or retire); (iii) remediation and testing of
all business systems and applications that have Y2K problems; and (iv)
implementation of corrective measures and certification of Y2K compliance
through internal audits.
We have substantially completed the inventory and assessment phase and have
identified and assessed four areas of risk: internally developed business
applications; third party vendor software, such as business applications,
operating systems and special function software; computer hardware components;
and embedded systems, such as phone switches. Although we cannot be certain, we
believe substantially all systems, applications and related software that are
subject to Y2K compliance risk have been identified and we have implemented a
plan to correct such systems that are not Y2K compliant. The implementation and
verification phase is expected to be substantially complete by June 30, 1999,
with inter-dependency testing substantially complete by October 1, 1999.
We rely on third-party service providers for services such as
telecommunications, internet service and components for our business systems
and other key services. Interruption of those services due to Y2K issues could
affect our operations. We have initiated an evaluation of the status of such
third-party service providers' efforts to determine alternative and contingency
requirements. Development of Century's Y2K Contingency Plan is expected to be
substantially complete by April 2, 1999 and will continue to be refined
throughout 1999 as additional information related to our potential exposure is
gathered. Century's Y2K Contingency Plan will supplement disaster recovery
plans already in place. While approaches to reducing risks of interruption of
business operations vary by subsidiary, options in Century's Y2K Contingency
Plan are expected to include measures such as identification of alternative
service providers and channels of distribution.
We continue to review the potential overall impact of Y2K risks on our
business, financial condition and results of operations. To date, we have not
encountered any material Y2K problems with our computer systems and related
equipment. Based on our ongoing survey of such risks for Century, our
subsidiaries and recently acquired businesses, management estimates that the
total cost of our Y2K Compliance Project will be approximately $2 to $3
million. This estimate assumes that all businesses that have been and that may
be acquired in the future by Century will not have significant Y2K compliance
issues. However, there can be no assurance that actual compliance costs will
fall within the range of this estimate, that any future acquisition of a
business will not require substantial Y2K compliance expenditures or that
precautions that we have taken to minimize the impact of such events will be
adequate. Any damage to our data information processing system, failure of
telecommunications links or breach of the security of our computer systems
could result in an interruption of our operations or other loss which may not
be covered by insurance. Any such event could have a material adverse effect on
our business, financial condition and results of operations.
ITEM 7A.
QUANTITATIVE INFORMATION ABOUT MARKET RISK. Century does not engage in trading
market risk sensitive instruments. Neither does Century purchase as
investments, hedges or for purposes "other than trading" instruments that are
likely to expose Century to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. Century has issued no
debt instruments, entered into no forward or futures contracts, purchased no
options and entered into no swaps.
QUALITATIVE INFORMATION ABOUT MARKET RISK. Century'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 Century could borrow funds under its Credit Facility.
Century's strategy to manage this exposure is to keep its borrowings to a
minimum.
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.
23
<PAGE> 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
24
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Company's
fiscal year.
The following table sets forth certain information as of December 31, 1998
regarding the directors, executive officers and certain key employees of
Century. Each executive officer of Century 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 Century and any other person pursuant
to which he or she was selected as an officer.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
-----------
EXECUTIVE OFFICERS AND DIRECTORS:
<S> <C> <C>
Michael G. DeGroote(3)............... 65 Chief Executive Officer, President and
Chairman of the Board
Charles D. Hamm, Jr.(3).............. 44 Senior Vice President and Chief Financial Officer
Douglas R. Gowland................... 57 Senior Vice President, Business Integration
Keith W. Reeves...................... 41 Senior Vice President, President of the
Accounting, Tax, Valuation and Advisory
Services Group
Robert A. O'Byrne.................... 42 Senior Vice President, President of the Benefits
Administration and Insurance Services Group
John J. Hopkins...................... 45 Senior Vice President, Product Development and
Marketing
Jerome P. Grisko, Jr. (3)............ 37 Senior Vice President, Mergers & Acquisitions and
Legal Affairs
Rick L. Burdick(1)................... 47 Director
Joseph S. DiMartino.................. 55 Director
Harve A. Ferrill(1)(2)............... 66 Director
Hugh P. Lowenstein(2)................ 68 Director
Richard C. Rochon(1)(2).............. 41 Director
OTHER KEY OFFICERS:
Leslie Wilk Braksick................. 33 Vice President
Daniel J. Clark...................... 44 Vice President
Ralph M. Daniel, Jr.................. 42 Vice President
Charles J. Farro..................... 48 Vice President
Kenneth M. Millisor.................. 61 Vice President
Steven M. Nobil...................... 51 Vice President
Patrick J. Simers.................... 38 Vice President
Craig L. Stout....................... 50 Vice President
Eldon G. Walter...................... 52 Vice President
C. Robert Wissler.................... 52 Vice President
Andrew B. Zelenkofske................ 38 Vice President
Barbara A. Rutigliano................ 47 Corporate Secretary
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Management Executive Committee
25
<PAGE> 25
EXECUTIVE OFFICERS AND DIRECTORS:
MICHAEL G. DEGROOTE has served as the Chairman of the Board of Century since
April 1995 and as Chief Executive Officer and President since November 1997.
Mr. DeGroote also served as President and Chief Executive Officer of Century
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.
CHARLES D. HAMM, JR. has served as Senior Vice President and Chief Financial
Officer since December 1998. Previously, Mr. Hamm was Chief Financial Officer
and Treasurer since November 1997. Mr. Hamm was associated with KPMG LLP, an
international accounting firm, 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.
DOUGLAS R. GOWLAND has served as Senior Vice President, Business Integration
since November 1997. Mr. Gowland served as a Director of Century from April
1995 through November 1997. From April 1995 until October 1996, Mr. Gowland
served as Century'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 since March 1997. He was
named President of the Accounting, Tax, Consulting and Valuation Services Group
in December 1998 and is currently a director and an officer of a number of
Century's subsidiaries. Mr. Reeves served as the President of SMR Business
Services, Inc. from December 1996 through July 1998. Mr. Reeves served as Vice
President of Skoda, Minotti, Reeves and Co., CPA's from August 1984 until its
acquisition by Century 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.
ROBERT A. O'BYRNE was named a Senior Vice President of Century in December
1998. He also currently serves as President of the Benefits Administration &
Insurance Services Group. Mr. O'Byrne served as Chairman of the Board and CEO
of Robert D. O'Byrne and Associates, Inc., an employee benefits
brokerage/consulting firm prior to its acquisition by Century in December 1997.
Mr. O'Byrne remains President and CEO of Robert D. O'Byrne and Associates, Inc.
and The Grant Nelson Group, Inc.
JOHN J. HOPKINS has served as Senior Vice President, Product Development &
Marketing of Century since December 1998. He served as Vice President, Business
Development from July 1998 through November 1998. Prior to joining Century, Mr.
Hopkins was associated with a personal investment and insurance firm from
October 1995 to December 1997, and in his final year, as Acting Chief Operating
Officer. From July 1976 to October 1995, Mr. Hopkins was associated with
Coopers & Lybrand LLP, where he served as a partner from October 1985 until
October 1995. Mr. Hopkins serves on the Board of Advisors of Drexel University
College of Business Administration. He is a CPA with a Masters in Taxation, and
a member of the American Institute of Certified Public Accountants and the
Pennsylvania Institute of Certified Public Accountants.
JEROME P. GRISKO, JR. joined Century as Vice President, Mergers & Acquisitions
in September 1998 and was promoted to Senior Vice President, Mergers &
Acquisitions and Legal Affairs in December of that year. Prior to joining
Century, Mr. Grisko was associated with the law firm of Baker & Hostetler LLP,
where he practiced from September 1987 until September 1998, serving as a
partner of such firm from January 1995 to September 1998. While at Baker &
Hostetler, Mr. Grisko concentrated his practice in the area of mergers,
acquisitions and divestitures. Mr. Grisko is a member of the American, Ohio and
Cleveland Bar Associations.
RICK L. BURDICK has served as a Director of Century since November 1997, when
he was elected as an outside director. Mr. Burdick has been a partner at the
law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. since April 1988. Mr.
Burdick serves on the Boards of Directors of RII and J. Ray McDermott, S.A.
JOSEPH S. DIMARTINO has served as a Director of Century since November 1997,
when he was elected as an outside director. Mr. DiMartino has been Chairman of
the Board of the Dreyfus Family of Funds since January 1995. Mr. DiMartino
served as President, Chief Operating Officer and Director of The Dreyfus
Corporation from October 1982 until December 1994 and was also a director of
Mellon Bank Corporation. Mr. DiMartino also serves on the Board of Directors of
Noel Group, Inc.; Career Blazers Inc.(formerly Staffing Resources, Inc.);
Health Plan Services Corporation; Carlyle Industries, Inc.; and the Muscular
Dystrophy Association.
26
<PAGE> 26
HARVE A. FERRILL has served as a Director of Century since October 1996, when
he was elected as an outside director. Mr. Ferrill has served as Chief
Executive Officer of Advance Ross Corporation, a company that provides tax
refunding services (ARC), since 1991 and as President of Ferrill-Plauche Co.,
Inc., a private investment company, since 1982. Mr. Ferrill served as President
of ARC from 1990 to 1993 and as Chairman of the Board from 1992 to 1996. Mr.
Ferrill serves on the Board of Directors of Gaylord Container Corporation.
HUGH P. LOWENSTEIN has served as a Director of Century since March 1997, when
he was elected as an outside director. 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 Century since October 1996, when
he was elected as an outside director. Mr. Rochon has served since 1988 as
President of Huizenga Holdings, Inc., a management and holding company for
diversified investments in operating companies, joint ventures, and real
estate, on behalf of its owner, Mr. H. Wayne Huizenga. Mr. Rochon also has
served as a director since September 1996 and as Vice Chairman 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 OFFICERS:
LESLIE WILK BRAKSICK was named Vice President in December 1998. She co-founded
The Continuous Learning Group, Inc. (CLG) in 1993, which is a behaviorally
based consulting organization and a wholly-owned subsidiary of Century since
March 1998. Dr. Braksick is also a member of the Board of Directors for the
Research Institute for Small and Emerging Businesses.
DANIEL J. CLARK was named Vice President in November 1997 and is the Senior
Vice President of Evergreen National Indemnity Company (Evergreen) and a
director of Century Surety Company (Century), both subsidiaries of Century.
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 Vice Chairman for the Port of Cleveland.
RALPH M. DANIEL, JR. was named as Vice President in November 1997. Mr. Daniel
served as Chairman and Chief Executive Officer of Century Payroll, Inc.
(formerly BMS) which he co-founded in 1988, prior to its acquisition in 1997.
Mr. Daniel is a CPA, Series 7 licensed investment broker and life/health
insurance licensed.
CHARLES J. FARRO was named Vice President in November 1997. Mr. Farro served as
Chairman and Chief Executive Officer of The Benefits Group, a subsidiary of
Century which he is a co-founder, prior to its acquisition in 1997. Mr. Farro
serves on the Boards of Directors of the Akron Art Museum.
KENNETH R. MILLISOR was named Vice President in November 1997. Mr. Millisor was
co-founder, President and Chief Executive Officer of Millisor & Nobil, LPA, a
labor and employment relations law firm headquartered in Cleveland, Ohio. He is
a Trustee of North American Employers Council, the marketing arm for Century's
non-insured worker's compensation. Mr. Millisor was admitted to the Ohio Bar in
1961 and is an active member of the Akron, Ohio and American Bar Associations.
STEVEN M. NOBIL was named Vice President in November 1997. Mr. Nobil was
co-founder of Millisor & Nobil, LPA, a labor and employment relations law firm
headquartered in Cleveland, Ohio. Mr. Nobil currently serves on several
charitable and educational Boards, including Baldwin Wallace College and
Cuyahoga Community College.
PATRICK J. SIMERS was named Vice President in November 1997. Mr. Simers served
as President of Valuation Counselors Group, Inc., a subsidiary of Century,
prior to its acquisition. Mr. Simers is a Certified Real Estate Appraiser in 14
states and maintains memberships in the American Society of Appraisers.
CRAIG L. STOUT has served as Vice President since November 1997. Mr. Stout
served as Chief Operating Officer and a Director of Century from October 1996
through November 1997. Mr. Stout also serves as a director and an officer of a
number of Century's insurance subsidiaries. Prior to joining Century, 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.
27
<PAGE> 27
ELDON G. WALTER was named Vice President in February 1999. Mr. Walter served as
Chairman and President of Mayer Hoffman McCann, L.C. from 1988 until the
acquisition by Century of MHM Business Services, Inc. Mr. Walter now serves as
President of MHM Business Services, Inc. Mr. Walter has over 30 years of
experience in all aspects of taxation, and he is affiliated with the American
Institute of Certified Public Accountants, the Missouri Society of Certified
Public Accountants and the Kansas City Estate Planning Association.
C. ROBERT WISSLER was named Vice President in November 1997. Mr. Wissler serves
as President and Chief Executive Officer of Century Small Business Solutions,
Inc., a subsidiary of Century. From 1990 to 1997, Mr. Wissler served as CEO of
Comprehensive Business Services, a franchisor of accounting services. 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 CPA and a Director of the
International Franchise Association.
ANDREW B. ZELENKOFSKE was named Vice President in November 1997. Mr.
Zelenkofske served as President of ZA Business Services, Inc., a subsidiary of
Century, prior to its acquisition in 1997. 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 an attorney 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.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Company's
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Company's
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Company's
fiscal year.
28
<PAGE> 28
DRAFT
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 Century
(filed as Exhibit 3.1 to Century'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 Century dated October 18, 1996 (filed as Exhibit 3.2 to
Century'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 Century effective December 23, 1997 (filed as Exhibit 3.3
to Century's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated by reference).
3.4* Certificate of Amendment of the Certificate of Incorporation
of Century dated September 10, 1998.
3.5 Amended and Restated Bylaws of Century (filed as Exhibit 3.2
to Century'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 Century.
10.1 Credit Agreement dated as of August 10, 1998, 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 1 to Century's
Report on Form 10-Q for the period ended June 30, 1998,
and incorporated herein by reference).
10.2 1996 Employee Stock Option Plan (filed as Appendix I to
Century's Proxy Statement 1997 Annual Meeting of Stockholders
dated April 1, 1997, and incorporated herein by reference).
10.3 Amendment to the 1996 Employee Stock Option Plan (filed as
Exhibit 99.2 to Century's Current Report on Form 8-K dated
December 14, 1998, and filed January 12, 1999, and
incorporated herein by reference).
10.4 Agents 1997 Stock Option Plan (filed as Appendix II to
Century's Proxy Statement 1997 Annual Meeting of Stockholders
dated April 1, 1997, and incorporated herein by reference).
21.1* List of Subsidiaries of Century Business Services, Inc.
23.1* Consent of KPMG LLP
24.1* Powers of Attorney (included on the signature page hereto).
27.1* Financial Data Schedule.
*Indicates documents filed herewith.
(b) Reports on Form 8-K
Century Business Services, Inc. filed the following Current Reports on
Form 8-K during 1998:
Current Report on Form 8-K dated February 20, 1998.
Current Report on Form 8-K dated March 6, 1998.
Current Report on Form 8-K dated April 31, 1998, as amended on Form
8-K/A filed on June 10, 1998.
Current Report on Form 8-K dated December 14, 1998.
29
<PAGE> 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/ Charles D. Hamm, Jr.
-----------------------------------------------
Charles D. Hamm, Jr.
Senior Vice President & Chief Financial Officer
March 4, 1999
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
Charles D. Hamm, Jr. 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 in his name, place and stead, in all capacities (until revoked in
writing), to sign any and all amendments to this Annual Report of Century
Business Services, Inc. and to file the same, with all exhibits hereto, and
other documents in connection herewith, with the Securities and Exchange
Commission, granting unto each attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that each attorney-in-fact and agent, or their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report has been signed below by the following persons on behalf of
Century Business Services, Inc. and in the capacities and on the date indicated
above.
/s/ 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/ Charles D. Hamm, Jr. /s/ Harve A. Ferrill
- --------------------------------------- -------------------------------
Charles D. Hamm, Jr. Harve A. Ferrill
Chief Financial Officer Director
(Principal Financial and Accounting Officer)
/s/ Rick L. Burdick /s/ Hugh P. Lowenstein
- --------------------------------------- -------------------------------
Rick L. Burdick Hugh P. Lowenstein
Director Director
/s/ Richard C. Rochon
- ---------------------------------------
Richard C. Rochon
Director
<PAGE> 30
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report.......................................................... F-2
Consolidated and Combined Balance Sheets as of
December 31, 1998 and 1997....................................................... F-3
Consolidated and Combined Statements of Income for the years ended
December 31, 1998, 1997 and 1996................................................. F-4
Consolidated and Combined Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996................................................. F-5
Consolidated and Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996................................................. F-6
Notes to the Consolidated and Combined Financial Statements........................... F-8
Schedule I - Summary of Investments - Other than Investments in Related
Parties as of December 31, 1998.................................................. F-31
Schedule III - Supplementary Insurance Information for the years ended
December 31, 1998, 1997 and 1996................................................. F-32
Schedule IV - Reinsurance for the years ended
December 31, 1998, 1997 and 1996................................................. F-33
</TABLE>
F-1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CENTURY BUSINESS SERVICES, INC.:
We have audited the 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 also have 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, 1998 and 1997,
and the results of their operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998, 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 LLP
Cleveland, Ohio
February 16, 1999
F-2
<PAGE> 32
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 50,729 $ 29,236
Accounts receivable, less allowance for doubtful accounts of $5,243 and $1,948,
respectively 101,860 45,719
Premiums receivable, less allowance for doubtful accounts of $492 and $281,
respectively 9,284 7,812
Investments:
Fixed maturities held to maturity, at amortized cost 12,156 14,528
Securities available for sale, at fair value 70,879 59,523
Mortgage loans 740 1,839
Short-term investments 3,470 4,215
---------- ----------
Total investments 87,245 80,105
Deferred policy acquisition costs 5,746 4,478
Reinsurance recoverables 23,918 15,215
Goodwill, net of accumulated amortization of $5,838 and $1,297, respectively 293,374 89,856
Notes receivable 20,219 18,359
Other assets 56,302 25,837
---------- ----------
TOTAL ASSETS $ 648,677 $ 316,617
========== ==========
LIABILITIES
Accounts payable $ 32,423 $ 21,520
Losses and loss expenses payable 60,994 50,655
Unearned premiums 29,236 22,656
Bank debt 44,000 8,401
Notes payable and capitalized leases 30,556 16,126
Income taxes 7,704 3,708
Accrued expenses 37,312 29,623
Other liabilities 10,590 6,505
---------- ----------
TOTAL LIABILITIES 252,815 159,194
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized - 250,000,000 shares
Issued and outstanding - 72,787,615 shares at December 31, 1998;
47,260,550 shares at December 31, 1997 728 473
Additional paid-in-capital 330,068 128,591
Unearned ESOP (755) (861)
Treasury stock -- (1,581)
Retained earnings 65,692 29,039
Accumulated other comprehensive income 129 1,762
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 395,862 157,423
Commitments and contingencies
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 648,677 $ 316,617
========== ==========
</TABLE>
See the accompanying notes to the consolidated and
combined financial statements.
F-3
<PAGE> 33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Business services fees and commissions $ 297,520 $ 126,304 $ 56,057
Specialty insurance services (regulated):
Premiums earned 44,896 37,238 27,651
Net investment income 5,381 4,524 3,564
Net realized gain on investments 3,001 3,044 1,529
Other income, net 1,230 13 1,419
---------- ---------- ----------
Total revenues 352,028 171,123 90,220
---------- ---------- ----------
Expenses:
Operating expenses - business services 229,345 107,677 51,988
Losses and loss adjustment expenses 23,714 20,682 17,624
Policy acquisition expenses 14,932 9,670 7,699
General and administrative expenses 6,119 4,162 302
Depreciation and amortization expenses 10,575 3,401 1,028
Merger and acquisition costs 3,572 416 --
Interest income, net (800) (1,250) (220)
Other expenses, net 3,900 2,331 2,655
---------- ---------- ----------
Total expenses 291,357 147,089 81,076
---------- ---------- ----------
Income from continuing operations before income
tax expense 60,671 24,034 9,144
Income tax expense 21,234 6,543 2,003
---------- ---------- ----------
Income from continuing operations 39,437 17,491 7,141
Loss from operations of discontinued business
(net of income tax expense (benefit) of $0,
($316) and $91, respectively) -- (663) (38)
Loss on disposal of discontinued business
(net of income tax benefit of $305 in 1997) -- (572) --
---------- ---------- ----------
Net income $ 39,437 $ 16,256 $ 7,103
========== ========== ==========
Earnings per share:
Basic:
Income from continuing operations $ 0.65 $ 0.41 $ 0.30
Loss from discontinued operations -- (0.03) --
---------- ---------- ----------
Net income per share $ 0.65 $ 0.38 $ 0.30
========== ========== ==========
Diluted:
Income from continuing operations $ 0.53 $ 0.32 $ 0.24
Loss from discontinued operations -- (0.02) --
---------- ---------- ----------
Net income per share $ 0.53 $ 0.30 $ 0.24
========== ========== ==========
Weighted average common shares 61,129 42,776 23,699
========== ========== ==========
Weighted average common shares and
dilutive potential common shares 74,333 54,740 29,868
========== ========== ==========
Pro forma income data (from continuing operations)
(Note 2):
Net income as reported $ 39,437 $ 17,491 $ 7,141
Pro forma adjustment to provision for income taxes 896 1,477 955
---------- ---------- ----------
Pro forma net income $ 38,541 $ 16,014 $ 6,186
========== ========== ==========
Pro forma earnings per share:
Basic earnings per share $ 0.63 $ 0.37 $ 0.26
========== ========== ==========
Diluted earnings per share $ 0.52 $ 0.29 $ 0.21
========== ========== ==========
</TABLE>
See the accompanying notes to the consolidated and
combined financial statements.
F-4
<PAGE> 34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-In Retained Comprehensive ESOP Treasury
Shares Stock Capital Earnings Income Shares Stock Totals
---------- -------- ---------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 20,556,451 $ 206 $ 18,703 $ 13,781 $ 3,355 $ (990) $ (825) 34,230
Comprehensive income:
Net income -- -- -- 7,103 -- -- -- 7,103
Change in net unrealized
appreciation -- -- -- -- 476 -- -- 476
---------- ----------
Total comprehensive income -- -- -- 7,103 476 -- -- --
---------- ----------
Pre-merger transactions of pooled
entities -- -- 1,345 (4,560) -- 63 (185) (3,337)
Reverse merger 10,858,158 108 16,136 -- -- -- -- 16,244
Stock issuances 7,251,888 73 38,164 -- -- -- -- 38,237
Stock options 101,960 1 1,153 -- -- -- -- 1,154
Business acquisitions 792,500 8 5,252 -- -- -- -- 5,260
---------- -------- ---------- ---------- ---------- -------- -------- ----------
December 31, 1996 39,560,957 396 80,753 16,324 3,831 (927) (1,010) 99,367
Comprehensive income:
Net income -- -- -- 16,256 -- -- -- 16,256
Change in net unrealized
appreciation -- -- -- -- (2,069) -- -- (2,069)
---------- ----------
Total comprehensive income -- -- -- 16,256 (2,069) -- -- --
---------- ----------
Pre-merger transactions of
pooled entities -- -- 767 (3,541) -- 66 (571) (3,279)
Stock issuances 616,611 6 5,261 -- -- -- -- 5,267
Stock options 53,032 1 334 -- -- -- -- 335
Warrants 533,032 5 2,819 -- -- -- -- 2,824
Business acquisitions 6,496,918 65 38,657 -- -- -- -- 38,722
---------- -------- ---------- ---------- ---------- -------- -------- ----------
December 31, 1997 47,260,550 473 128,591 29,039 1,762 (861) (1,581) 157,423
Comprehensive income:
Net income -- -- -- 39,437 -- -- -- 39,437
Change in net unrealized
appreciation -- -- -- -- (1,633) -- -- (1,633)
---------- ----------
Total comprehensive income -- -- -- 39,437 (1,633) -- -- --
---------- ----------
Pre-merger transactions of
pooled entities -- -- (1,671) (2,784) -- 106 1,581 (2,768)
Stock issuances 3,800,000 38 47,657 -- -- -- -- 47,695
Stock options 60,900 1 679 -- -- -- -- 680
Warrants 8,902,418 88 35,378 -- -- -- -- 35,466
Business acquisitions 12,763,747 128 119,434 -- -- -- -- 119,562
---------- -------- ---------- ---------- ---------- -------- -------- ----------
December 31, 1998 72,787,615 $ 728 $ 330,068 $ 65,692 $ 129 $ (755) $ -- 395,862
========== ======== ========== ========== ========== ======== ======== ==========
</TABLE>
See the accompanying notes to the consolidated and
combined financial statements.
F-5
<PAGE> 35
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 39,437 $ 17,491 $ 7,141
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of business (1,450) (171) --
Net loss from operations of discontinued business -- (663) (38)
Net loss on disposal of discontinued business -- (572) --
Depreciation and amortization 25,507 13,071 8,727
Deferred income taxes (3,337) (958) (27)
Changes in assets and liabilities, net
of acquisitions and dispositions:
Accounts receivable, net (25,699) (13,708) (1,871)
Premiums receivable, net (1,472) 3,117 (915)
Deferred policy acquisition costs (16,200) (9,803) (8,616)
Reinsurance recoverables (8,703) (4,030) 1,462
Other assets (11,610) (7,833) (399)
Accounts payable 9,935 6,292 461
Losses and loss expenses payable 10,339 6,947 4,097
Unearned premiums 6,580 (1,582) 3,001
Income taxes 2,482 1,009 550
Accrued expenses and other liabilities 5,717 14,851 4,407
Non-cash charges and working capital changes
from discontinued operations -- (15,620) --
Other, net (768) 993 (2,338)
---------- ---------- ----------
Net cash provided by operating activities 30,758 8,831 15,642
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities, held to maturity (2,099) (869) (1,318)
Purchase of fixed maturities, available for sale (73,802) (21,227) (12,478)
Purchase of equity securities (5,873) (2,816) (2,921)
Redemption of fixed maturities, held to maturity 4,607 1,172 1,000
Sale of fixed maturities, available for sale 59,786 6,006 9,333
Sale of equity securities 6,260 1,285 675
Net (increase) decrease in mortgage loans 1,099 1,846 (292)
Change in short-term investments 745 584 (3,956)
Business acquisitions, net of cash acquired (73,384) (35,822) 912
Proceeds from dispositions of businesses 2,744 10,700 --
Net additions to property and equipment (12,217) (2,882) (1,156)
Net decrease in notes receivable 2,571 18 196
---------- ---------- ----------
Net cash used in investing activities (89,563) (42,005) (10,005)
---------- ---------- ----------
</TABLE>
F-6
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 92,075 8,401 --
Proceeds from notes payable and capitalized leases 1,847 5,250 80
Payment of bank debt (56,476) -- --
Payment of notes payable and capitalized leases (38,221) (6,845) (1,078)
Pre-merger equity transactions (2,768) (3,279) (3,337)
Proceeds from stock issuances 47,695 5,267 38,237
Proceeds from exercise of stock options and warrants 36,146 3,159 --
---------- ---------- ----------
Net cash provided by financing activities 80,298 11,953 33,902
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 21,493 (21,221) 39,539
Cash and cash equivalents at beginning of year 29,236 50,457 10,918
---------- ---------- ----------
Cash and cash equivalents at end of year:
Continuing operations 50,729 29,236 48,082
Discontinued operations -- -- 2,375
---------- ---------- ----------
Total cash and cash equivalents at end of year $ 50,729 $ 29,236 $ 50,457
========== ========== ==========
</TABLE>
See the accompanying notes to the consolidated and
combined financial statements.
F-7
<PAGE> 37
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 (Century) is a
diversified services company which, acting through its subsidiaries,
provides professional outsourced business services primarily to small and
medium-sized businesses, as well as individuals, governmental entities,
and not-for-profit enterprises throughout the United States. Century
offers integrated services in the following areas: accounting, tax,
valuation, and advisory services; benefits administration and insurance
services; human resources and payroll services; performance consulting
services; and specialty insurance.
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, Century began trading under the symbol
"IASI" in anticipation of the merger with Alliance Companies. The name
change to Century Business Services, Inc. was approved December 23, 1997
and Century now trades under the symbol "CBIZ."
Basis of Consolidation
The consolidated and combined financial statements include the accounts
of Century and its wholly owned subsidiaries. The accompanying
consolidated and combined financial statements have been restated for the
business combinations accounted for as pooling-of-interests (Note 2) as
if such combined companies had operated as one entity since inception.
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.
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 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.
F-8
<PAGE> 38
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents consist 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, Century had deposits
with financial institutions in excess of the $100,000 federally insured
limit.
Investments
All fixed maturity securities that Century 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
taxes, reported as a separate component of comprehensive income. Century
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 include other than temporary declines,
if any. Interest income is recognized on the accrual basis and dividend
income is recognized on the ex-dividend date.
Century adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" on January 1, 1998. As required by
the Statement, Century displays the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the consolidated and combined
balance sheet. Items considered to be other comprehensive income are the
adjustments made for unrealized holding gains and losses on available
for sale securities. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
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.
Reinsurance Ceded
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. 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. Century is not relieved of its primary obligation in a
reinsurance transaction.
Goodwill
Goodwill is being amortized on a straight-line basis over the expected
periods to be benefited, which is generally 40 years. It is Century's
policy to periodically evaluate the recoverability of goodwill based on
an evaluation of such factors as the occurrence of a significant adverse
event or change in the environment in which the business operates or if
the expected future net cash flows, undiscounted and without interest,
would become less than the carrying amount of the asset. An impairment
loss would be recorded in the period such determination is made based on
the fair value of the related businesses. Amortization expense from
continuing operations was approximately $4,841,000, $1,334,000 and
$33,000 in 1998, 1997 and 1996, 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.
F-9
<PAGE> 39
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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; with
deductions 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 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.
F-10
<PAGE> 40
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Revenue Recognition
Revenue for business services is recognized when products are delivered
or services are performed. Revenue is recorded net of certain associated
costs, such as commissions paid to third party brokers. Bad debt expense
for the years ended 1998, 1997 and 1996 was $1,847,000, $2,179,000 and
$124,000, respectively.
Earnings per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of stock options,
warrants and contingent shares.
Stock Options
Compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. Century
provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and subsequent
years as if the fair-value-based method had been applied.
New Accounting Standards
In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP is effective for fiscal 2000 and requires
that start-up costs and organizational costs be expensed as incurred and
that such costs capitalized previously be expensed as a cumulative effect
of change in accounting principle. Century does not believe that SOP 98-5
will have a material impact on its financial position or results of
operations when such statement is adopted.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" for
fiscal years beginning after June 15, 1999. SFAS No. 133 requires the
recognition of all derivatives in the consolidated and combined balance
sheet as either assets or liabilities measured at fair value. Century
will adopt SFAS No. 133 effective for the 2000 calendar year end. Century
does not expect the adoption of SFAS No. 133 to have a material impact on
its financial position or results of operations since it does not engage
in hedging activities or hold derivatives.
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. Century uses 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.
F-11
<PAGE> 41
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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. Century is exposed to this
risk by the majority of its business in Ohio and 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 Century will default, or other parties, including
reinsurers that owe Century money, will not pay. Century 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. Century 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 Century'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, 1998.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
F-12
<PAGE> 42
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
2. ACQUISITIONS
During fiscal 1998, Century continued its strategic acquisition program,
purchasing the businesses of sixty-eight complementary companies. These
acquisitions comprised the following: fifty-one accounting, tax,
valuation and advisory services businesses, fourteen benefits
administration and insurance services businesses, and three performance
consulting services businesses.
Forty-eight of the acquisitions were accounted for as purchases, 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 aggregate purchase price
of these acquisitions was approximately $194.0 million, excluding future
contingent consideration of up to $22.6 million in cash and/or notes and
3.4 million shares of restricted common stock (estimated stock value of
$33.0 million at acquisition) based on the acquired companies ability to
meet or exceed certain performance goals. The aggregate purchase price,
excluding future contingent consideration, has been allocated to the net
assets of the acquired companies based upon their respective fair market
values. Goodwill approximated $293.4 million and is being amortized over
periods not exceeding 40 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 following data summarizes, on an unaudited pro forma basis, the
combined results of continuing operations of Century and the businesses
acquired for the two years ended December 31,1998. 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):
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Net revenues - pro forma $ 475,715 $ 351,465
============= ============
Net income - pro forma $ 50,912 $ 21,623
============= ============
Earnings per common share - pro forma
- basic $ 0.76 $ 0.41
============= ============
- diluted $ 0.63 $ 0.33
============= ============
</TABLE>
Century exchanged 6.5 million shares of its common stock for all of the
respective common stock of twenty acquisitions accounted for under the
pooling-of-interests method of accounting for business combinations.
Accordingly, Century's financial statements have been restated to include
the results of the pooled entities for all periods presented.
Revenues and net income for Century and the pooled entities prior to
their respective mergers for the year ended December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Company $ 317,307 $ 108,230 $ 35,769
Pooled entities 34,721 62,893 54,451
---------- ---------- ----------
Combined $ 352,028 $ 171,123 $ 90,220
========== ========== ==========
Net Income
Company $ 35,077 $ 11,530 $ 4,384
Pooled entities 4,360 4,726 2,719
---------- ---------- ----------
Combined $ 39,437 $ 16,256 $ 7,103
========== ========== ==========
</TABLE>
There were no significant transactions between Century and the pooled
entities prior to the combination. Certain reclassifications were made to
the pooled entities financial statements to conform to Century's
presentations.
F-13
<PAGE> 43
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Several of the aforementioned pooling-of-interests transactions involved
enterprises that previously had not been subjected to income taxes.
Accordingly, pro forma adjustments have been presented in the
consolidated and combined statements of income.
Merger transaction costs consist primarily of fees for attorneys,
accountants, financial advisors, printing and other related charges. All
pooling transaction costs are expensed as incurred.
3. INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 8,040 $ 129 $ 13 $ 8,156
Corporate securities 4,044 33 - 4,077
Mortgage-backed securities 72 - - 72
------------ ----------- ----------- -----------
Totals $ 12,156 $ 162 $ 13 $ 12,305
============ =========== =========== ===========
</TABLE>
The amortized cost and estimated fair value of securities available for
sale at December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government agencies $ 1,652 $ 39 $ - $ 1,691
Corporate securities 15,273 30 64 15,239
Municipal bonds 21,825 193 27 21,991
Mortgage-backed securities 18,354 25 36 18,343
Other asset-backed securities 7,465 42 91 7,416
--------------- ------------- ------------- --------------
64,569 329 218 64,680
Equity securities 6,165 156 122 6,199
--------------- ------------- -------------- --------------
Totals $ 70,734 $ 485 $ 340 $ 70,879
=============== ============= ============= ==============
</TABLE>
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, 1998, by contractual
maturity, were as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 7,510 $ 7,550
Due after one year through five years 4,498 4,583
Due after ten years 76 100
------------ ------------
12,084 12,233
Mortgage-backed securities 72 72
------------ ------------
$ 12,156 $ 12,305
============ ============
</TABLE>
F-14
<PAGE> 44
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 1998, by contractual maturity, were as follows
(in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less $ 1,104 $ 1,106
Due after one year through five years 6,295 6,341
Due after five years through ten years 24,934 25,022
Due after ten years 6,417 6,452
------------ -----------
38,750 38,921
Mortgage-backed securities 18,354 18,343
Other asset-backed securities 7,465 7,416
------------ -----------
$ 64,569 $ 64,680
============ ===========
</TABLE>
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1997 were as follows (in thousands):
F-15
<PAGE> 45
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government 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
=============== ============= ============= ==============
</TABLE>
The amortized cost and estimated fair value of securities available for
sale at December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government 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-asset backed securities 11,842 120 8 11,954
--------------- ------------- ------------- --------------
50,751 863 69 51,545
Equity securities 6,392 1,736 150 7,978
--------------- ------------- ------------- --------------
Totals $ 57,143 $ 2,599 $ 219 $ 59,523
=============== ============= ============= ==============
</TABLE>
Net investment income was comprised of the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Interest $ 5,309 $ 4,519 $ 3,652
Dividends 391 341 142
-------------- -------------- -------------
Total investment income 5,700 4,860 3,794
Less: investment expense (319) (336) (230)
--------------- -------------- -------------
Net investment income $ 5,381 $ 4,524 $ 3,564
============== ============== =============
</TABLE>
F-16
<PAGE> 46
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Realized gains and losses on investments for the years ended December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Realized gains:
Available for sale:
Fixed maturities $ 1,511 $ 26 $ 117
Equity securities 1,760 3,066 1,381
Other - - 125
-------------- ------------- -------------
Total realized gains 3,271 3,092 1,623
-------------- ------------- -------------
Realized losses:
Available for sale:
Fixed maturities 97 10 32
Equity securities 173 38 35
Other - - 27
-------------- ------------- -------------
Total realized losses 270 48 94
-------------- ------------- -------------
Net realized gains on investments $ 3,001 $ 3,044 $ 1,529
============== ============= =============
</TABLE>
The change in net unrealized appreciation of investments is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Available for sale:
Fixed maturities $ (683) $ 444 $ (708)
Equity securities (1,552) (3,413) 1,483
----------- ------------ -----------
$ (2,235) $ (2,969) $ 775
=========== ============ ===========
</TABLE>
The components of net unrealized appreciation on securities available
for sale at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Gross unrealized appreciation $ 145 $ 2,380 $ 5,349
Deferred income tax (16) (618) (1,518)
----------- ------------ -----------
Net unrealized appreciation $ 129 $ 1,762 $ 3,831
=========== ============ ===========
</TABLE>
As a result of the adoption of SFAS 130 in 1998, reclassification
adjustments related to gains on securities available for sale at December
31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Holding gains (losses) arising during the period (766) (75) 2,304
Reclassification adjustment for gains realized
in net income 3,001 3,044 (1,529)
----------- ------------ -----------
Other comprehensive income (loss) (2,235) (2,969) 775
Income tax expense (benefit) (602) (900) 299
----------- ------------ -----------
Other comprehensive income (loss), net of tax (1,633) (2,069) 476
=========== ============ ===========
</TABLE>
F-17
<PAGE> 47
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Fixed maturities held to maturity and certificates of deposit with a
carrying value of approximately $10,085,000 and $9,869,000 at December
31, 1998 and December 31, 1997, respectively, were on deposit with
regulatory authorities as required by law. At December 31, 1998 and 1997,
all mortgage loans were secured by properties in the states of
California, Michigan and Ohio.
The following methods and assumptions were used by Century 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.
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.
4. DEFERRED POLICY ACQUISITION COSTS
At December 31, changes in deferred policy acquisition costs were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year $ 4,478 $ 4,345 $ 3,428
Policy acquisition costs deferred 16,200 9,803 8,616
Amortized to expense during the year (14,932) (9,670) (7,699)
------------- ------------- -------------
Balance, end of year $ 5,746 $ 4,478 $ 4,345
============= ============= =============
</TABLE>
5. REINSURANCE
In the ordinary course of business, Century assumes and cedes reinsurance
with other insurers and reinsurers. These arrangements provide Century
with a greater diversification of business and generally limit the
maximum net loss potential on large risks. Although the ceding of
reinsurance does not discharge an insurer from its primary legal
liability to a policyholder, the reinsuring company assumes the related
liability. Excess of loss reinsurance contracts in effect through
December 31, 1998 generally protect individual property losses over
$150,000 and casualty losses over $100,000. Additionally, the contract
surety business is generally reinsured on a 75% quota share basis of the
first $500,000 in losses. Landfill bonds are reinsured on a variable
quota share basis with the maximum retention limited to $500,000. Workers
compensation business is 75% ceded on a quota share basis to reinsurers.
Century 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. Catastrophe
coverage is also maintained.
F-18
<PAGE> 48
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The impact of reinsurance is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Premiums written:
Direct $ 54,458 $ 47,488 $ 42,420
Assumed 28,475 12,263 468
Ceded (34,836) (22,263) (11,739)
-------- -------- --------
Net $ 48,097 $ 37,488 $ 31,149
======== ======== ========
Premiums earned:
Direct $ 53,127 $ 48,085 $ 39,311
Assumed 23,226 7,647 576
Ceded (31,457) (18,494) (12,236)
-------- -------- --------
Net $ 44,896 $ 37,238 $ 27,651
======== ======== ========
Losses and loss expense incurred:
Direct $ 24,066 $ 20,135 $ 18,618
Assumed 18,056 2,820 210
Ceded (18,408) (2,273) (1,204)
-------- -------- --------
Net $ 23,714 $ 20,682 $ 17,624
======== ======== ========
</TABLE>
The reinsurance payables were $10,285,000 and $7,828,000 at December 31,
1998 and 1997, respectively.
Reinsurance recoverables were comprised of the following as of December
31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Recoverables on unpaid losses and loss expenses $16,438 $ 8,256 $ 8,114
Receivables on ceding commissions and other 5,365 5,851 2,702
Receivables on paid losses and expenses 2,115 1,108 369
------- ------- -------
$23,918 $15,215 $11,185
======= ======= =======
</TABLE>
Century evaluates the financial condition of its reinsurers and
establishes a valuation allowance as reinsurance receivables are deemed
uncollectible. During 1998, the majority of ceded amounts were ceded to
General Reinsurance Corporation, Republic Western Insurance Company, John
Hancock Mutual Life, Signet Star Reinsurance Company, and SCOR
Reinsurance Company. Century monitors concentrations of risks arising
from similar geographic regions or activities to minimize its exposure to
significant losses from catastrophic events.
F-19
<PAGE> 49
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
6. LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLE
Activity in the liability for unpaid losses and loss expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1 $ 50,655 $ 41,099 $ 37,002
Less: reinsurance recoverables, net (8,256) (8,114) (8,914)
-------- -------- --------
Net balance at January 1 42,399 32,985 28,088
-------- -------- --------
Incurred related to:
Current year 26,742 21,839 17,216
Prior years (3,028) (1,157) 408
-------- -------- --------
Total incurred 23,714 20,682 17,624
-------- -------- --------
Paid related to:
Current year 7,918 2,468 3,684
Prior years 13,639 8,800 9,043
-------- -------- --------
Total paid 21,557 11,268 12,727
-------- -------- --------
Net balance at December 31 44,556 42,399 32,985
Plus: reinsurance recoverables, net 16,438 8,256 8,114
-------- -------- --------
Balance at December 31 $ 60,994 $ 50,655 $ 41,099
======== ======== ========
</TABLE>
Century had experienced lower than anticipated ultimate losses on prior
years due primarily to a lower loss development factor utilized in
establishing the liability for losses and loss expenses payable.
Century's environmental exposure from continuing operations relates
primarily to its coverage of remediation related risks, thus management
believes Century's exposure to historic pollution situations is minimal.
Century's non-insurance environmental exposure from discontinued
operations is discussed in Note 15.
7. INCOME TAXES
A summary of income tax expense (benefit) included in the consolidated
and combined statements of income is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal $ 20,092 $ 8,232 $ 2,495
State and Local 3,161 1,075 409
-------- ------- -------
23,253 9,307 2,904
Deferred income taxes (2,019) (2,764) (901)
-------- ------- -------
Total continuing operations 21,234 6,543 2,003
Discontinued operations -- (621) 91
-------- ------- -------
$ 21,234 $ 5,922 $ 2,094
======== ======= =======
</TABLE>
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):
F-20
<PAGE> 50
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory rate $ 21,235 $ 8,412 $ 3,109
State taxes (net of federal benefit) 1,855 454 270
Change in valuation allowance (1,379) (908) (589)
Tax exempt interest and dividends
received deduction (176) (78) (33)
Nondeductible goodwill 1,413 383 --
Change in estimated liabilities -- -- 196
Acquired nontaxable entities (1,344) (1,477) (955)
Other, net (370) (243) 5
---------- ---------- ----------
Provision for income taxes from continuing
operations $ 21,234 $ 6,543 $ 2,003
========== ========== ==========
Effective income tax rate 35% 27% 22%
========== ========== ==========
Pro forma effective income tax rate on
pooled entities 37% 33% 32%
========== ========== ==========
</TABLE>
F-21
<PAGE> 51
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Loss expenses payable discounting $ 2,789 $ 2,852
Net operating loss carryforwards 2,584 2,696
Unearned premiums not deductible 1,379 1,122
Deferred compensation 3,527 632
Allowance for doubtful accounts 1,311 388
Other deferred tax assets 611 97
-------------- -------------
Total gross deferred tax assets 12,201 7,787
Less: valuation allowance (756) (2,135)
--------------- -------------
Net deferred tax assets 11,445 5,652
-------------- -------------
Deferred tax liabilities:
Change in accounting method 7,940 3,782
Unrealized appreciation on investments 16 618
Deferred policy acquisition costs 2,011 1,523
Reinsurance recoverable 581 408
Deferred commission revenues 841 -
Accelerated depreciation and amortization 1,131 -
Other deferred tax liabilities 1,051 235
-------------- -------------
Total gross deferred tax liabilities 13,571 6,566
-------------- -------------
Net deferred tax liability, included in income
taxes in the consolidated and combined
balance sheets $ 2,126 $ 914
============== =============
</TABLE>
Century had net operating loss (NOL) carryforwards of approximately
$6,700,000 and $7,500,000 at December 31, 1998 and 1997, respectively,
from the separate return years of certain acquired entities. These losses
are subject to limitations regarding the offset of Century'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.
Century 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 separate company
profitability of certain acquired entities. Century has established
valuation allowances for portions of acquired NOL carryforwards. The net
change in the valuation allowance for the years ended December 31, 1998
and 1997 was a decrease of $1,379,000 and an increase of $756,000,
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 at December 31, 1998
and 1997.
8. BANK DEBT, NOTES PAYABLE, AND CAPITALIZED LEASES
Century maintains lines of credit with several banks. Century's primary
line of credit is a $100,000,000 revolving credit facility with several
financial institutions, with Bank of America as Agent, and expiring
August 8, 2000. At December 31, 1998, approximately $44,000,000 was
outstanding under such credit facility. Century's lines of credit are
subject to normal banking terms and conditions.
Bank debt, notes payable, and capitalized leases, consists of the
following (in thousands):
F-22
<PAGE> 52
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31
--------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Bank debt:
Revolving credit facilities, effective rates of 6.25% to 8.5% $ 44,000 $ 8,401
============= ==============
Notes payable and Capitalized leases:
Promissory notes payable to former owners of acquired
businesses, various rates, due 1999 to 2006 $ 24,793 $ 8,523
Other notes payable, various rates, due 1999 to 2005 5,327 7,082
Capitalized leases, various rates, payable in installments through 2002 436 131
Other - 390
------------- --------------
$ 30,556 $ 16,126
============= ==============
</TABLE>
At December 31, 1998 aggregate maturities of bank debt, notes payable,
and capitalized leases, were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
1999 $ 27,765
2000 1,042
2001 919
2002 227
2003 44,195
Thereafter 408
------------
$ 74,556
============
</TABLE>
Management believes that the carrying amounts of bank debt, notes
payable, and capitalized leases recorded at December 31, 1998 approximate
fair values.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Century leases certain of its premises and equipment under various
operating lease agreements. At December 31, 1998, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1999............................ $ 18,644
2000............................ 15,704
2001............................ 13,172
2002............................ 9,817
2003............................ 6,877
Thereafter...................... 17,832
-------------
$ 82,046
=============
</TABLE>
Total rental expense incurred under operating leases was approximately
$14,360,000, $5,994,000 and $2,864,000 in 1998, 1997 and 1996,
respectively.
Other
In the ordinary course of business, Century 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 Century's results of
operations or financial position.
F-23
<PAGE> 53
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFITS
Century has various 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 these plans for 1998, 1997 and 1996, amounted to approximately
$2,318,000, $1,289,000, and $820,000, respectively. In addition,
Century has an employee stock ownership plan (ESOP) through one of its
acquired subsidiaries and unallocated shares of the ESOP are shown as a
reduction to shareholders' equity.
11. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limits the payment of dividends by an insurance company to its
parent. The maximum dividend that may be paid without prior approval of
the Director of Insurance is limited to the greater of the statutory net
income of the preceding calendar year or 10% of total statutory surplus
as of the prior December 31.
The consolidated and combined financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP).
Century's insurance subsidiaries file annual financial statements with
the Ohio Department of Insurance and are prepared on the basis of
accounting practices prescribed by such regulatory authorities, which
differ from GAAP. Prescribed statutory accounting practices 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 Century's insurance subsidiaries are in accordance with
prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital (RBC) formula. This model act requires every property and
casualty insurer to calculate its total adjusted capital and RBC
requirement, and provides for an insurance commissioner to intervene if
the insurer experiences financial difficulty. The model act became law in
Ohio in March 1996, states where certain subsidiaries of Century are
domiciled. The RBC formula includes components for asset risk, liability
risk, interest rate exposure and other factors. Century's insurance
subsidiaries exceeded all required RBC levels as of December 31, 1998 and
1997.
The CSC Group's statutory net income for the years ended December 31,
1998, 1997 and 1996 was approximately $4,889,000, $6,803,000, and
$2,607,000, respectively. The statutory capital and surplus as of
December 31, 1998 and 1997 was approximately $32,553,000 and
$31,461,000, respectively.
12. COMMON STOCK
Century's authorized common stock consists of 250,000,000 shares of
common stock, par value $0.01 per share. The holders of Century's common
stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders. There are no cumulative voting
rights with respect to the election of directors. Accordingly, the holder
or holders of a majority of the outstanding shares of Common Stock will
be able to elect the directors of Century then standing for election as
terms expire. Holders of Common Stock have no preemptive rights and are
entitled to such dividends as may be declared by the Board of Directors
of Century 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 Century, the holders of Common
Stock are entitled to share ratably in the net assets of Century
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.
F-24
<PAGE> 54
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
During 1997 and 1998, Century completed registration filings relating to
its common stock. The shares were registered under the Securities Act on
behalf of selling shareholders in order to permit the public or private
sale or distribution of the shares. Accordingly, Century does not receive
any proceeds from the sale of these shares. In total, 44,172,519 shares
of common stock were registered, of which 19,160,599 were issuable upon
exercise of outstanding warrants. In addition to these filings, Century
also completed two shelf registration filings in December 1997. Century
has registered 7,729,468 shares of common stock issuable in connection
with acquisitions under the Securities Act and $125 million in debt,
common stock, or warrants. To date, Century has issued 3,791,973 of
common stock and expects to issued $25 million of common stock and
warrants, leaving 3,937,495 and $100 million available for future use.
In February and May 1998, Century completed a private placement in which
it sold an aggregate of 3,800,000 newly issued shares of common stock to
qualified investors at an aggregate purchase price of $13.25 per share
and realized approximately $47.7 million in proceeds, net of expenses.
In April 1997, Century completed a private placement in which it sold
an aggregate of 616,611 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. Century realized net proceeds of approximately
$5.3 million.
In December 1996, Century completed a private placement in which it
offered 3,251,888 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. Century realized net proceeds of $27.7 million.
In October 1996, Century issued 4,000,000 shares of its common stock
and warrants to purchase an additional 12,000,000 shares of 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 $10.5 million.
Century also granted warrants in connection with certain acquisitions
made during 1997. 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 Century. The last
restriction on transferring these locked-up warrants expires in April
2000.
In connection with the RESI Transaction, RESI agreed to issue to holders
of unexpired warrants of its former parent, additional RESI warrants to
acquire shares of RESI's common stock equal to one fifth of the number of
shares available. At the distribution date, RESI adjusted the per share
exercise price of the RESI warrants to reflect the effect of the
distribution on the market prices of RESI and its former parent's common
stock. These warrants are designated as stapled warrants and expire at
various dates through December 2000. The holders of these warrants are
able to exercise under the original terms of the warrants and will
receive Century common stock.
At December 31, 1998, there were outstanding unexercised warrants to
acquire 13,476,969 shares of Century's common stock at prices ranging
from $1.075 to $13.06, of which 1,071,134 warrants are restricted from
transfer in accordance with various lock-up agreements discussed above.
At December 31, 1997 there were outstanding unexercised warrants to
acquire 22,379,387 shares of Century's common stock at prices ranging
from $1.075 to $13.06, of which 1,806,334 warrants were subject to
various lock-up agreements.
Under the 1997 Agents Stock Option Plan, a maximum of 1,200,000 options
may be awarded. The purpose of the 1997 plan is to provide
performance-based compensation to certain insurance agencies and
individual agents who write quality surety business for Century's
insurance subsidiaries. The options vest only to the extent the agents
satisfy minimum premium commitments and certain loss ratio performance
criteria. The options terminate in June 2002, or earlier under certain
conditions, including termination of the agency agreement.
F-25
<PAGE> 55
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Under the 1996 Employee Stock Option Plans, a maximum of 4,000,000
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.
Prior to the RESI Transaction, certain options were granted to employees,
directors and affiliates of RESI's former parent company. When RESI was
spun-off in April 1995 (the "Distribution Date"), optionees received
options to acquire RESI Common Stock at the ratio of one RESI option for
each five options under the former parent's 1990 and 1991 Stock Option
plans. The outstanding options at the Distribution Date and the RESI
options granted with respect thereto are stapled and are only exercisable
if exercised together. As a result of the sale of RESI in July 1997,
options under these plans became fully vested. These options, 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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning of year 2,060,540 317,072 190,200
Granted (a) 1,624,995 1,870,500 230,000
Exercised (b) (60,820) (53,032) (101,960)
Expired or canceled (44,200) (74,000) (1,168)
---------- ---------- ----------
Outstanding at end of year (c) 3,580,515 2,060,540 317,072
---------- ---------- ----------
Exercisable at end of year (d) 469,880 567,640 22,320
========== ========== ==========
Available for future grant at the end of year 1,840,325 342,500 273,000
========== ========== ==========
</TABLE>
(a) Options were granted at average costs of $16.44, $11.69 and $2.31
in 1998, 1997 and 1996, respectively.
(b) Options were exercised at prices ranging from $1.08 to $11.00 and
averaging $6.64 in 1998, prices ranging from $1.08 to $2.31 and
averaging $1.68 in 1997, and prices ranging from $1.08 to $3.60
and averaging $3.43 in 1996.
(c) Prices for options outstanding at December 31, 1998 ranged from
$1.08 to $17.75 and averaged $13.72 with expiration dates ranging
from June 2000 to October 2004. 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, 1998 and 1997 averaged $9.25
and $7.11, respectively.
Had the cost of stock option plans been determined based on the
provisions of SFAS No. 123, Century's net income and earnings per share
pro forma amounts would be as follows (in thousands):
<TABLE>
<CAPTION>
As Reported Pro Forma
Basic Diluted Basic Diluted
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
1998
----
Net income $ 39,437 $ 39,437 $ 38,354 $ 38,354
============= ============= ============= ===========
Net income per common share $ 0.65 $ 0.53 $ 0.63 $ 0.52
============= ============= ============= ===========
1997
----
Net income $ 16,256 $ 16,256 $ 15,924 $ 15,924
============= ============= ============= ===========
Net income per common share $ 0.38 $ 0.30 $ 0.37 $ 0.29
============= ============= ============= ===========
1996
----
Net income $ 7,103 $ 7,103 $ 7,077 $ 7,077
============= ============= ============= ===========
Net income per common share $ 0.30 $ 0.24 $ 0.30 $ 0.24
============= ============= ============= ===========
</TABLE>
The above results may not be representative of the effects on net income
for future years.
F-26
<PAGE> 56
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Century applied the Black-Scholes option-pricing model to determine the
fair value of each option granted in 1998, 1997 and 1996. Below is a
summary of the assumptions used in the calculation:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Risk-free interest rate 6.07% 6.01% 6.03%
Dividend yield -- -- --
Expected volatility 35.00% 35.00% 35.00%
Expected option life (in years) 3.75 3.75 3.75
</TABLE>
The stock options issued to key employees in 1998 were assumed to vest at
a rate of 100%.
13. EARNINGS PER SHARE
For the years presented, Century 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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Numerator
Net Income $ 39,437 $ 16,256 $ 7,103
Denominator:
Basic
Weighted average common shares 61,129 42,776 23,699
Diluted
Warrants 12,506 11,721 6,001
Options 458 243 168
Contingent shares 240 -- --
---------- ---------- ----------
Total 74,333 54,740 29,868
========== ========== ==========
Basic EPS $ 0.65 $ 0.38 $ 0.30
========== ========== ==========
Diluted EPS $ 0.53 $ 0.30 $ 0.24
========== ========== ==========
Pro forma income data:
Pro forma net income $ 38,541 $ 16,014 $ 6,186
========== ========== ==========
Basic EPS $ 0.63 $ 0.37 $ 0.26
========== ========== ==========
Diluted EPS $ 0.52 $ 0.29 $ 0.21
========== ========== ==========
</TABLE>
Basic earnings per common share was computed by dividing net income by
the weighted average number of shares of common stock outstanding during
the year. Diluted earnings per common share for the years 1998, 1997 and
1996 were determined on the assumption that the options, warrants and
contingent shares (when applicable) were exercised at the beginning of
the period, or at time of issuance, if later.
As a result of the adoption of SFAS No. 128 in 1997, Century's reported
earnings per share for 1996 were restated. The effect of this accounting
change on previously reported earnings per share (EPS) was as follows:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Per share amount
Primary EPS as reported $ 0.26
Effect of SFAS No. 128 0.04
-------------
Basic EPS as restated $ 0.30
=============
Fully diluted EPS as reported $ 0.20
Effect of SFAS No. 128 0.04
-------------
Diluted EPS as restated $ 0.24
=============
</TABLE>
F-27
<PAGE> 57
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
During 1998, Century provided aggregate consideration of $18 million in
the form of notes payable in early 1999 in lieu of cash in conjunction
with two purchase acquisitions. In addition, Century received a $3
million note receivable in connection with the sale of M&N Risk
Management and M&N Enterprise, Inc.
Century 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, Century
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.
In December 1994, ENIC participated in a transaction whereby ENIC
obtained an agreed upon amount of net assets of an unrelated party as
consideration in completing the sale and the related settlements of debt
of two unrelated parties. The transaction included a contingent
receivable of up to $2,900,000 due ENIC from the unrelated party. Based
on the performance of the insurance operations sold, it was determined
that $807,000 and $1,150,000 be recognized as revenue during 1994 and
1996, respectively. ENIC does not have any future obligations with
respect to the insurance operations under the terms of the transaction
agreements.
CASH PAID DURING THE YEAR FOR:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST $ 1,972 $ 692 $ 388
========== ========== ==========
INCOME TAXES $ 17,238 $ 5,896 $ 1,749
========== ========== ==========
</TABLE>
15. DIVESTITURES
In February 1997, Century signed a letter of intent to sell Century's
Environmental Services business. In July 1997, Century 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 approximated a net loss of $572,000. Century's
contingent liability is limited to $1.5 million in connection with such
divestitures. Management does not believe Century will experience a loss
in connection with such contingencies.
In December 1997, Century 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. As part of the transaction, a strategic alliance between
Century and the purchaser was established whereby Century will continue
to have access to environmental resources for the benefit of its
insurance customers after the sale.
In December 1998, Century sold M&N Risk Management, Inc. and M&N
Enterprises, Inc. for cash and notes, resulting in a gain of
approximately $1.5 million which is included in "Other expenses, net" in
the accompanying consolidated and combined statements of income.
16. SUBSEQUENT EVENTS
From January 1, 1999 to March 4,1999, Century completed the acquisition
of five accounting, tax, valuation, and advisory service businesses. The
aggregate purchase price of these acquisitions was approximately $9.0
million, excluding future contingent consideration of up to $1.3 million
in cash and 148,549 shares of restricted common stock (estimated stock
value of $1.2 million at acquisition) based on the acquired companies
ability to meet certain performance goals. All of these transactions will
be accounted for under the purchase method of accounting.
F-28
<PAGE> 58
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data are summarized as follows (amounts in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1998 March 31, June 30, September 30, December 31,
---- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 78,681 $ 81,234 $ 85,344 $ 106,769
============== ============== ============== ==============
Net income $ 9,225 $ 9,106 $ 9,532 $ 11,574
============== ============== ============== ==============
Earnings per common share:
Basic $ 0.18 0.16 0.15 0.17
============== ============== ============== ==============
Diluted $ 0.14 0.13 0.13 0.15
============== ============== ============== ==============
Pro forma earnings per common share:
Basic $ 0.17 0.16 0.15 0.17
============== ============== ============== ==============
Diluted $ 0.13 0.12 0.12 0.15
============== ============== ============== ==============
Weighted average common shares 51,364 56,449 62,218 68,501
============== ============== ============== ==============
Weighted average common shares
and diluted potential common shares: 65,712 72,126 75,787 77,851
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
1997 March 31, June 30, September 30, December 31,
---- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 33,153 $ 37,931 $ 41,832 $ 58,207
============== ============== ============== ==============
Income from continuing operations $ 4,475 $ 4,439 $ 4,425 $ 4,152
Income (loss) from discontinued operations (534) (179) 50 (572)
-------------- -------------- -------------- --------------
Net income $ 3,941 $ 4,260 $ 4,475 $ 3,580
============== ============== ============== ==============
Earnings per common share:
Basic -
Continuing Operations $ 0.11 $ 0.11 $ 0.10 $ 0.09
Discontinued operations (0.01) (0.01) -- (0.01)
-------------- -------------- -------------- --------------
Net Income $ 0.10 0.10 0.10 0.08
============== ============== ============== ==============
Earnings per common share:
Diluted -
Continuing operations $ 0.08 $ 0.08 $ 0.08 $ 0.07
Discontinued operations (0.01) -- -- (0.01)
-------------- -------------- -------------- --------------
Net income $ 0.07 $ 0.08 $ 0.08 $ 0.06
============== ============== ============== ==============
Pro forma earnings per common share:
Basic $ 0.10 0.09 0.09 0.09
============== ============== ============== ==============
Diluted $ 0.07 0.07 0.07 0.07
============== ============== ============== ==============
Weighted average common shares 40,343 41,653 43,764 45,129
============== ============== ============== ==============
Weighted average common shares
and diluted potential common shares: 53,895 52,878 54,828 56,330
============== ============== ============== ==============
</TABLE>
F-29
<PAGE> 59
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
18. SEGMENT DISCLOSURES
Century adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," on January 1, 1998, which
establishes standards for reporting selected information about operating
segments, products and services, geographic areas and major customers.
Century's business units have been aggregated into two reportable
segments: specialty insurance and business services. The business units
have been aggregated based on the following factors: the products and
services are similar, the services are provided to the same customers,
and the long term financial performance of these units is affected by
similar economic conditions, in addition to considering the regulatory
environment of the specialty insurance segment.
The insurance segment provides specialty insurance, bonding services and
workers' compensation coverage primarily to small to medium companies
through Century's insurance subsidiaries. The insurance segment provides
three primary categories of services: commercial liability lines
consisting of 40 different programs, surety bonds consisting of two major
programs, and workers' compensation coverage which generally provides
employers with an integrated system of actuarial analysis and
underwriting capabilities with claims administration.
The business services segment offers integrated services in the following
areas: accounting, tax, valuation and advisory services; benefits
administration and insurance services, human resources and payroll
services, and performance consulting services. These services are
provided primarily to individuals and small to medium sized companies in
a variety of different industries including, but not limited to,
manufacturing, construction, healthcare, and automotive industries.
Century operates solely in the United States and there is no one customer
that represents a significant portion of sales.
Segment information for the December 31, 1998, 1997, and 1996 was as
follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Business Corporate
Services Insurance and other Total
--------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Revenues $ 297,520 $ 54,508 $ -- $ 352,028
Intercompany revenue 16,892 -- (16,892) --
Pre-tax income 59,682 10,155 (9,166) 60,671
Depreciation and amortization 9,528 15,353 626 25,507
Total assets 187,604 152,013 309,060 648,677
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
Business Corporate
Services Insurance and other Total
--------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Revenues $ 126,304 $ 44,819 $ 0 $ 171,123
Pre-tax income 15,778 12,094 (3,838) 24,034
Depreciation and amortization 3,133 9,713 225 13,071
Total assets 171,910 124,070 20,637 316,617
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------------
Business Corporate
Services Insurance and other Total
--------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Revenues $ 56,057 $ 34,163 $ -- $ 90,220
Pre-tax income 5,221 5,865 (1,942) 9,144
Depreciation and amortization 990 7,699 38 8,727
Total assets 28,719 107,685 58,339 194,743
</TABLE>
F-30
<PAGE> 60
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC.
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT AT WHICH
SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---------- ---------- -------------
<S> <C> <C> <C>
Fixed maturities - held in maturity:
Bonds:
U.S. Treasury securities and obligations of U.S. ............
government agencies ......................................... 8,040 8,156 8,040
Corporate securities ........................................ 4,044 4,077 4,044
Mortgage-backed securities .................................. 72 72 72
Fixed maturities - available for sale:
Bonds:
U.S. Treasury securities and obligations of U.S. ............
government agencies ......................................... 1,652 1,691 1,691
Corporate securities ........................................ 15,273 15,239 15,239
Municipal bonds ............................................. 21,825 21,991 21,991
Mortgage-backed securities .................................. 18,354 18,343 18,343
Other-asset backed securities ............................... 7,465 7,416 7,416
---------- ---------- ----------
Total fixed maturities ................................. 76,725 76,985 76,836
---------- ---------- ----------
Equity securities:
Common Stock:
Industrial, miscellaneous and all other ..................... 634 677 677
Nonredeemable preferred stocks .................................. 5,531 5,522 5,522
---------- ---------- ----------
Total equity securities ................................ 6,165 6,199 6,199
---------- ---------- ----------
Mortgage loans .................................................. 740 740 740
Short-term investments .......................................... 3,470 3,470 3,470
---------- ---------- ----------
Total investments ...................................... 87,100 87,394 87,245
========== ========== ==========
</TABLE>
F-31
<PAGE> 61
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
FUTURE POLICY
DEFERRED BENEFITS, OTHER POLICY
POLICY LOSSES CLAIM CLAIMS AND
ACQUISITION AND LOSSES UNEARNED BENEFITS
SEGMENT COST EXPENSE PREMIUMS PAYABLES PREMIUM REVENUE
------- ----------- ------------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Year Ended:
December 31, 1998........ 5,746 60,994 29,236 N/A 44,896
December 31, 1997........ 4,478 50,655 22,656 N/A 37,238
December 31, 1996........ 4,345 41,099 18,637 N/A 27,651
</TABLE>
<TABLE>
<CAPTION>
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
---------- ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Year Ended:
December 31, 1998........ 5,381 23,714 14,932 7,289 54,458
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
</TABLE>
F-32
<PAGE> 62
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC.
SCHEDULE IV-REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
OTHER OTHER ASSUMED
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
------------ --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Years Ended December 31, 1998
Property - Casualty Earned Premiums......... $ 53,127 $ 31,457 $ 23,226 $ 44,896 51.73%
Years Ended December 31, 1997
Property - Casualty Earned Premiums......... 48,085 18,494 7,647 37,238 20,54%
Years Ended December 31, 1996
Property - Casualty Earned Premiums......... 39,311 12,236 576 27,651 2.08%
</TABLE>
F-33
<PAGE> 1
Exhibit 3.4
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
CENTURY BUSINESS SERVICES, INC.
Century Business Services, Inc. a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), does hereby certify
as follows:
1. That the first paragraph of Article Four of the Certificate of
Incorporation of the Corporation is hereby amended and restated in
its entirety as follows:
"ARTICLE FOUR
The total number of shares of all classes of stock which this
Corporation shall have authority to issue is 250,000,000 shares,
consisting of 250,000,000 shares of Common Stock, $.01 par value
per share. The aggregate par value of all shares of all classes of
stock that this Corporation has authority to issue is
$2,500,000.00."
2. That said amendments to this Certificate of Amendment to the
Certificate of Incorporation of the Corporation were duly adopted
in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
3. That this Certificate of Amendment to the Certificate of
Incorporation shall become effective upon filing with the
Secretary of State of the State of Delaware.
THE UNDERSIGNED, being the Executive Vice President of this
Corporation, hereby declares and certifies that this Certificate of Amendment to
the Certificate of Incorporation of Century Business Services, Inc. is his act
and deed and the facts herein stated are true, and accordingly has hereunto set
his hand this 10th day of September, 1998.
CENTURY BUSINESS SERVICES, INC.
By: /s/ Gregory J. Skoda
---------------------------------------
Gregory J. Skoda, Executive Vice President
<PAGE> 1
Exhibit 4.1
_____________
CENTURY
BUSINESS
SERVICES
_____________
NUMBER SHARES
__________________________ __________________________
CBIZ-
__________________________ __________________________
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 156490 10 4
________________________________________________________________________________
THIS CERTIFIES THAT
IS THE OWNER OF
________________________________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 OF
CENTURY BUSINESS SERVICES, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender this Certificate properly endorsed. This certificate and
the shares evidenced hereby are issued under and shall be subject to all of the
provisions of the Articles of Incorporation of the Corporation and any
amendments thereto, copies of which are on file with the Corporation and the
Transfer Agent, to all of which the holder by acceptance hereof, assents. This
Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signature of its
duly authorized officers.
Dated:
CORPORATE SECRETARY CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
STAR BANK, N.A.
(Cincinnati, Ohio) TRANSFER AGENT
AND REGISTRAR
BY AUTHORIZED SIGNATURE
<PAGE> 2
CENTURY BUSINESS SERVICES, INC.
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS, A STATEMENT OF THE DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF WHICH THE COMPANY IS AUTHORIZED TO ISSUE AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST
IS TO BE ADDRESSED TO THE SECRETARY OF THE COMPANY OR TO THE TRANSFER AGENT OR
CO-TRANSFER AGENT NAMED ON THE FACE OF THIS CERTIFICATE.
________________________________________________________________________________
The following abbreviations, when used in the inscription of the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT _____________ Custodian ___________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to Minors
right of survivorship and Act ______________________________
not as tenants in common (State)
</TABLE>
Additional abbreviations may be used though not in the above list.
FOR VALUE RECEIVED,____________________hereby sells, assigns and transfers unto
Please insert social security or other
identifying number of assignee
______________________________________
______________________________________
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP OR POSTAL CODE,
OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________Shares
of the Common Stock represented by the within certificate, and does hereby
irrevocably constitute and appoint_____________________________________________
_______________________________________________________________________Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated: ____________________________
X __________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE> 1
Exhibit 21.1
SUBSIDIARY COMPANIES OF CENTURY BUSINESS SERVICES, INC.
AS OF DECEMBER 31, 1998
1. CBSI Management Co. (Ohio)
2. Contract Operations Planning, Incorporated (Ohio)
3. Contract Surety Reinsurance Corp. (Ohio)
4. Commercial Surety Agency, Inc. d.b.a. Century Surety Underwriters (Ohio)
5. Century Surety Underwriters, Inc. (Indiana)
6. Century Surety Company (Ohio)
7. American Inspection and Audit Services, Inc. (Ohio)
8. Continental Heritage Insurance Company (Ohio)
9. CSC Insurance Agency, Inc. (Ohio)
10. Evergreen National Indemnity Company (Ohio)
11. SMR & Co. Business Services (Ohio)
12. Millisor Firm Co., Inc. (Ohio)
13. The Benefits Group Agency, Inc. (Ohio)
14. TBG Investment Advisors Agency, Inc. (Ohio)
15. Next Risk Management, Inc. (Ohio)
16. Surety Associates II, Inc. (Connecticut)
17. Connecticut Escrow, Inc. (Ohio)
18. Marvel Consultants, Inc. (Ohio)
19. ERIC Agency, Inc. (Colorado)
20. ERIC Environmental Consultants, Inc. (Ohio)
21. ZA Business Services, Inc. (Ohio)
22. St. James General Agency, Inc. (Texas)
23. Century Payroll, Inc. (Ohio)
24. BMS Employee Benefits, Inc. (Virginia)
25. Valuation Counselors Group, Inc. (Ohio)
26. Century Small Business Solutions, Inc. (Ohio)
27. Funds Administration Services, Inc. (Ohio)
28. Tanker & Associates, Inc. (Ohio)
29. CKS Business Services, Inc. (Ohio)
30. Trilogy Associates, Inc. (Ohio)
31. National Benefit Systems of Arizona, Inc. (Arizona)
32. SR Business Services, Inc. (Ohio)
33. SKB Business Services, Inc. (Ohio)
34. Century Capital Group, Inc. (Ohio)
35. Health Administration Services, Inc. (Ohio)
36. Bass Consultants of Ohio, Inc. (Ohio)
37. Rootberg Business Services, Inc. (Ohio)
38. Robert D. O'Byrne & Associates, Inc. (Missouri)
39. The Grant Nelson Group, Inc. (Missouri)
40. BCC Business Services, Inc. (Ohio)
41. Kaufman Davis Business Services, Inc. (Ohio)
42. Continuous Learning Group, Inc (Ohio).
43. Envision Development Group, Inc. (Ohio)
44. Multi-Dimensional International Consultants, Inc. (Ohio)
45. Employers Select Plan Agency of Ohio, Inc. (Ohio)
46. M. T. Donahoe and Associates, Inc. (Ohio)
47. National Retirement Planning, Inc. (Pennsylvania)
48. Business Valuation Services, Inc. (Ohio)
1
<PAGE> 2
49. Love Insurance Agency, Inc. (Ohio)
50. BA Business Services, Inc. (Ohio)
51. Managed Care Solutions, Inc. - (Illinois)
52. SK&B Business Services, Inc. - (Ohio)
53. Varney Business Services, Inc. (Ohio)
54. Ross Gordon & Associates, Inc. (California)
55. S&S Business Services, Inc. (Ohio)
56. CBIZ Technologies, Inc.
57. KA Consulting Services, Inc. (Ohio)
58. Moore, Tyler & Company, Inc. (Ohio)
59. MRC Business Services, Inc. (Ohio)
60. S&L Business Services, Inc. (Georgia)
61. Sloan and Letson Investment Advisors, Inc. - (Georgia)
62. Rosemont Business Services, Inc. (California)
63. Evans & Evans, Incorporated (Ohio)
64. Highwood Associates, Inc. (Illinois)
65. BVKT Business Services, Inc. (Ohio)
66. SLW Business Services, Inc. (Ohio)
67. Century Retirement & Wealth Management Services, Inc. (Ohio)
68. DP & Co. Business Services, Inc. (Ohio)
69. RS&A Business Services, Inc. (Colorado)
70. LM Acquisition Corp. (Ohio)
71. Southern Ohio Benefits Agency, Inc. (Ohio)
72. Cornerstone Broker Insurance Services Agency, Ltd. (Ohio)
73. Gibraltor Real Estate Services Corporation (Illinois)
74. Century Risk Services Company (Ohio)
75. Century Surety Services Group, Inc. (Ohio)
76. Century Agency Management Group, Inc. (Ohio)
77. MHM Business Services, Inc. (Ohio)
78. G&C Business Services, Inc. (Ohio)
79. Beall, Garner, Screen and Geare, Inc. (Maryland)
80. Niederhoffer-Henkel & Company, LLC(Georgia)
81. RRSS & Company Business Services, Inc. (Ohio)
82. MRP Business Solutions Group, Inc. (Ohio)
83. B.L.U. Business Services, Inc. (Ohio)
84. Beatty Satchell Business Services, Inc. (Maryland)
85. PDA Business Services, Inc. (Ohio)
86. Duitch, Franklin & Company, LLP (Ohio)
87. The Weiss Group, Inc. (Ohio)
88. Devon Tax Group, LLC (CA)
89. Medical Management Professionals, Inc. (Ohio)
90. B & S Business Services, Inc. (Ohio)
91. David & Samson Business Services, Inc. (Virginia)
92. McClain & Company Business Services, Inc. (Ohio)
93. Information Technology Advisors and Consultants, Inc. (Ohio)
94. TC Business Services, Inc. (Ohio)
2
<PAGE> 3
95. Norman Barken Associates, Inc. (Ohio)
96. S & B Business Services, Inc.(Ohio)
97. Century Payroll Solutions, Inc.
98. Jones, Heyward, & Lenzi Business Services, Inc. (Ohio)
99. SLP Business Services, Inc. (Ohio)
100. WC&M Business Services, Inc. (Ohio)
101. Shilling & Kenyon/SK Consulting, Inc.
102. AVTAX, Inc. - (Ohio)
103. Automation Experts Business Services, Inc. (Ohio)
104. Parks Palmer Business Services, Inc. - (Ohio)
3
<PAGE> 1
Exhibit 23.1
The Board of Directors
Century Business Services, Inc.:
We consent to incorporation by reference in the registration statements Nos.
333-35049 and 333-98382 on Forms S-8; Nos. 333-46687 and 333-64109 on Forms S-3;
Nos. 333-27825, 333-15413 and 333-40331 on Forms S-3 as amended; and No.
333-40313 on Form S-4 as amended of Century Business Services, Inc. and
Subsidiaries of our report dated February 16, 1999, relating to the consolidated
and combined balance sheets of Century Business Services, Inc. and Subsidiaries
as of December 31, 1998 and 1997, and the related consolidated and combined
statements of income, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, and all related
schedules, which report appears in the December 31, 1998, annual report on Form
10-K of Century Business Services, Inc. and Subsidiaries.
/s/ KPMG LLP
Cleveland, Ohio
February 16, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 64,680
<DEBT-CARRYING-VALUE> 12,156
<DEBT-MARKET-VALUE> 12,305
<EQUITIES> 6,199
<MORTGAGE> 740
<REAL-ESTATE> 0
<TOTAL-INVEST> 87,245
<CASH> 50,729
<RECOVER-REINSURE> 23,918
<DEFERRED-ACQUISITION> 5,746
<TOTAL-ASSETS> 648,677
<POLICY-LOSSES> 60,994
<UNEARNED-PREMIUMS> 29,236
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 74,556
0
0
<COMMON> 728
<OTHER-SE> 395,134
<TOTAL-LIABILITY-AND-EQUITY> 648,677
44,896
<INVESTMENT-INCOME> 5,381
<INVESTMENT-GAINS> 3,001
<OTHER-INCOME> 1,230
<BENEFITS> 23,714
<UNDERWRITING-AMORTIZATION> 14,932
<UNDERWRITING-OTHER> 3,900
<INCOME-PRETAX> 60,671
<INCOME-TAX> 21,234
<INCOME-CONTINUING> 39,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,437
<EPS-PRIMARY> .65
<EPS-DILUTED> .53
<RESERVE-OPEN> 42,399
<PROVISION-CURRENT> 26,742
<PROVISION-PRIOR> (3,028)
<PAYMENTS-CURRENT> 7,918
<PAYMENTS-PRIOR> 13,639
<RESERVE-CLOSE> 44,556
<CUMULATIVE-DEFICIENCY> 3,030
</TABLE>
