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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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
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(State or Other Jurisdiction
of Incorporation or Organization)
22-2769024
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(IRS Employer Identification No.)
6480 ROCKSIDE WOODS BOULEVARD
SOUTH, SUITE 330
CLEVELAND, OHIO
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(Address of Principal Executive Offices)
44131
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(Zip Code)
(216) 447-9000
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Registrant's telephone number, including area code
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:
- accounting, tax, valuation, and advisory services
- benefits administration and insurance services
- human resources and payroll services
- performance consulting services
- 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
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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.
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:
- cross-serving Century's business services to its existing customer
base
- attracting new customers with its diverse business services offering
- realizing economies of scale through the integration of its business
services to combine its purchasing of products and services on a
national scale and reduce the costs of those products and services as
a result of volume discounts
- 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:
- have a strong potential for cross-serving among Century's subsidiaries
- have strong, energetic and entrepreneurial leadership
- have healthy historic and expected future internal growth
- can add to the level and breadth of services offered by Century
thereby enhancing its competitive advantage over other outsourced
business services providers
- 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.
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During 1998, Century continued its strategic acquisition program,
purchasing the businesses of 68 complementary companies. These acquisitions
comprise the following:
- fifty-one accounting, tax, valuation, and advisory services companies
- fourteen benefits administration and insurance services companies
- 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.
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:
- continuing to provide clients with a broad range of high-quality
products and services
- 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
- 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.
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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.
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. Under
this alliance, if any of Century's clients within its small to mid-sized
business and individual national client base identifies a need for financial
products or services, Century will refer the client to Merrill Lynch. For each
such referral that results in the client purchasing any financial products or
services, Merrill Lynch will pay a fee to Century Retirement & Wealth
Management, Inc., a wholly-owned subsidiary of Century Business Services, Inc.,
the amount of which depends on the products or services purchased.
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,
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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., which Century believes is 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.
SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
Century's key competitive factors in obtaining clients for business
services are:
- a strong existing sales network and marketing program,
- established relationships and the ability to match client requirements
with available services and
- products at competitive prices.
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.
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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:
- broad range of high-quality services and products
- knowledgeable and trained personnel
- entrepreneurial culture
- large number of locations
- operational economies of scale
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
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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.
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 phrases
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
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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:
- maintain the high quality of the services that we provide to our
customers;
- increase the number of services provided to our existing customers;
- recruit, motivate and retain qualified personnel; and
- 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.
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
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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.
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
9
<PAGE> 11
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 an adverse effect on our business, financial condition and results of
operations.
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<PAGE> 12
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:
- invest primarily in debt instruments of government agencies and
corporate entities with quality ratings of B or better;
- invest in a range of investments;
- have an investment committee that oversees all investments; and
- employ professional investment advisors who provide general investment
advice as well as advice on individual investments.
As of December 31, 1998, approximately 98% of the Company's investments of
insurance-related assets were in debt instruments of government agencies and
corporate entities with quality ratings of B or better. 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:
- 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
- approximately 7.6 million shares, representing 10% of all our
outstanding common stock, was owned by Mr. Huizenga, a principal
shareholder
- 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:
- 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;
- $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
- 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
11
<PAGE> 13
among other things. In addition, under our credit facility, we cannot pay cash
dividends without the prior written consent of the lenders. We currently intend
to retain future earnings to finance the ongoing operations and growth of the
business.
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.
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<PAGE> 14
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.
<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
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 15
<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>
OTHER DATA
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>
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 $180.9 million increase was primarily
attributable to (i) Century's acquisitions during 1998 that were accounted for
under the purchase method of accounting, which increased total revenues in 1998
by $82.2 million, and (ii) 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."
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<PAGE> 16
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 $83.7 million for the year
ended December 31, 1998 from $73.4 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.
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 costs. 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.
15
<PAGE> 17
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 an 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.
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 $73.4 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,
16
<PAGE> 18
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.
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.
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<PAGE> 19
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.
18
<PAGE> 20
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.
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
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<PAGE> 21
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. At December 31, 1998, the
maximum dividend that may be paid by our regulated insurance subsidiaries to the
Company without prior approval of the Director of Insurance of the State of Ohio
was $4.9 million. In addition, under such credit facility, Century cannot pay
cash dividends without the prior written consent of the lender.
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 the rate offered by a specified bank to
major banks in the offshore dollar interbank market. The credit facility
requires the Company to comply with various affirmative and negative
covenants, including;
- a net worth covenant that requires the Company to maintain a
consolidated net worth equal to the sum of (i) $221 million plus
(ii) 70% of subsequent net income plus (iii) the net proceeds of
any equity security offerings;
- additional indebtedness may not exceed $11 million;
20
<PAGE> 22
- cash dividends may not be paid without the prior written consent of
the lender; and
- restrictions on certain liens, mergers, dispositions of assets and
investments.
The Company was in compliance with all of the covenants under the credit
facility as of December 31, 1998.
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.
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
21
<PAGE> 23
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.
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 completed the inventory and assessment phase for all business
systems and applications subject to Y2K risk 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 have sought compliance verification for 100% of vendor supported
technology inventoried, local public utilities and services, banking and
financial institutions, telecommunications services, property management
companies (where our facilities are leased), and other material third parties on
whom or on whose systems we rely. Significant business customers and clients are
presently being contacted for compliance status and to coordinate Y2K
contingency strategies. We received a written or verbal response on
approximately 75% of our requests from vendors, approximately 80% of which
stated they are Y2K compliant, and 20% of which stated they had a plan for
compliance in place. None of the responses indicated that they had not yet
addressed the Y2K issue. Vendors that had not responded or did not provide
compliant upgrades or patches were removed from our configuration standards and
replaced by compliant systems of other vendors. Some property management
companies, however, have delayed in responding. In many cases we have made four
written requests for compliance. The property management companies that have not
responded are not material third parties and are not expected to have a material
impact on our business if their systems are not year 2000 compliant. We intend
to continue requesting Y2K compliance status responses from these property
management companies.
22
<PAGE> 24
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. MARKET RISK
Quantitative Information About Market Risk. Century's exposure to market
risk, including interest rate risk, is immaterial. If market interest rates were
to increase or decrease immediately and uniformly by 100 basis points from
levels at December 31, 1998, in each case the impact on Century's financial
condition and results of operations would be immaterial. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
23
<PAGE> 25
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)
---- --- -----------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Michael G. DeGroote(3).......................... 65 Chairman of the Board, President and Chief
Executive Officer
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, Business 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 R. 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
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.
24
<PAGE> 26
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
25
<PAGE> 27
Resources, Inc.); Health Plan Services Corporation; Carlyle Industries, Inc.;
and the Muscular Dystrophy Association.
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 Board 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.
26
<PAGE> 28
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 membership 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.
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.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors determines the
compensation of the Chief Executive Officer of Century and the other executive
officers named in the Summary Compensation Table. The Compensation Committee has
furnished the following report on executive compensation in connection with the
Annual Meeting.
Compensation Philosophy
As members of the Compensation Committee, it is our duty to administer the
executive compensation program for Century. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of Century, evaluating the performance of such executive officers in
meeting such goals and making recommendations to the Board of Directors with
regard to executive compensation.
27
<PAGE> 29
Century's compensation philosophy is to ensure that executive compensation
be directly linked to continuous improvements in corporate performance,
achievement of specific operational, financial and strategic objectives and
increases in stockholder value. The Compensation Committee regularly reviews the
compensation packages of Century's executive officers, taking into account
factors which it considers relevant, such as business conditions within and
outside the industry, Century's financial performance, the market compensation
for executives of similar background and experience and the performance of the
executive officer under consideration. The particular elements of Century's
compensation programs for executive officers are described below.
Compensation Structure
Mr. DeGroote, the Chairman of the Board, Chief Executive Officer and
President of Century during 1998, has elected not to receive any compensation
for his services provided to Century. Mr. DeGroote's substantial stock position
in Century assures us of his close identification with the interests of
Century's stockholders.
With the exception of Mr. DeGroote, the executive base compensation for
executive officers of Century is intended to be competitive with that paid in
comparably-sized, publicly held companies in the outsourced business services
industry that are growing aggressively, taking into account the scope of
responsibilities and internal relationships. The goals of the Compensation
Committee in establishing Century's executive compensation program are:
(1) To fairly compensate the executive officers of Century and its
subsidiaries for their contributions to Century's short-term and long-term
performance. The elements of Century's executive compensation program are
(a) annual base salaries, (b) annual bonuses and (c) equity incentives.
(2) To allow Century to attract, motivate and retain the management
personnel necessary to Century's success by providing an executive
compensation program comparable to that offered by comparably-sized
companies in the outsourced business services industry.
Individual base salaries are based on the scope of the executive's
responsibilities, a subjective evaluation of the executive's performance,
including the performance of the business for which such executive is
responsible, the executive's ability to network, ability to influence,
leadership potential and loyalty, and the length of time the executive has been
in the position. In recruiting executives, the potential executive's salary in
his or her current position is used as an immediate benchmark. Annual cash
bonuses are not typically given to executives. If given, however, annual cash
bonuses are based on the financial performance of the Company and the
executive's individual job performance. Century prefers to award equity
incentives to executives, typically in the form of stock options. Stock options
are granted by the Compensation Committee based on the executive's individual
job performance and to provide incentive to executives to maximize stock price
appreciation thereby aligning their interests with those of Century's
stockholders.
Executive Compensation Deductibility
It is Century's intent that amounts paid pursuant to Century's compensation
plans will generally be deductible compensation expenses. The Compensation
Committee does not currently anticipate that the amount of compensation paid to
executive officers will exceed the amounts specified as deductible pursuant to
Section 162(m) of the Internal Revenue Code of 1986, as amended.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Hugh P. Lowenstein, Chairman
Richard C. Rochon
Harve A. Ferrill
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.
28
<PAGE> 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain agreements and transactions between
or among Century and certain related parties. It is Century's policy to enter
into transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
Century's experience and the terms of its transactions with unaffiliated
parties, it is the Board of Directors' belief that the transactions described
below met these standards at the time of the transactions.
In February of 1998, Century arranged for the private placement of
5,000,000 shares of common stock. Century accepted subscriptions from
institutional and other accredited investors, including Westbury (Bermuda) Ltd.,
a Bermuda corporation controlled by Mr. DeGroote. The private placement included
3.8 million newly-issued shares and 1.2 million shares sold by certain selling
stockholders, including Mr. Stout and the spouses of Messrs. Skoda and Reeves,
for a purchase price of $13.25 per share. Mr. Stout sold 120,000 shares and
exercised warrants to purchase 39,200 shares of common stock at an exercise
price of $2.625. Such warrants would have expired by their terms on October 18,
1998. Mrs. Skoda sold 29,250 shares and exercised 14,000 warrants expiring on
October 18, 1998 at the $2.625 exercise price. Mrs. Reeves sold 19,000 shares,
and a corporation owned by Mrs. Skoda and Mrs. Reeves, among others, exercised
warrants to purchase 19,600 shares at the $2.625 exercise price. Such warrants
would have expired on October 18, 1998. Additionally, Mr. LoConti, a 10%
shareholder of Century during portions of 1998, sold 150,000 shares, and the
LoConti Family Trust, over which Mr. LoConti has control, sold 200,000 shares.
Mr. LoConti and the LoConti Family Trust also exercised 84,000 and 145,600 of
the October 18, 1998 warrants, respectively, at the $2.625 exercise price.
Finally, Sophia Management Ltd., an Ohio limited liability company whose members
include Messrs. LoConti, Skoda, Hamm, Stout and Mr. Stout's spouse, also sold
556,750 shares and exercised 955,503 warrants. Such warrants consisted of
840,000 warrants with an exercise price of $2.625 and 115,503 warrants with an
exercise price of $3.125.
During 1998, Century repaid a note consisting of $1.3 million in principal
and $57,458 in interest to Sophia Management Ltd. in accordance with its terms.
The interest rate on this note is three-month LIBOR.
Mr. Gowland and his spouse own controlling interests in SD Aviation
Investments, Inc., an aircraft charter company, used occasionally by Century.
During 1998, Century paid $63,000 to SD Aviation for aircraft charter services.
The office building utilized by SMR & Co. Business Services is leased under
a ten-year lease, expiring February 26, 2006, from a partnership in which the
spouses of Messrs. Skoda and Reeves are each one-third owners. The lease
provides for rental payments of $557,700 per year. A number of the businesses
acquired since October 1996 are located in properties owned indirectly by and
leased from persons employed by Century. Such leases are not material to
Century. In the aggregate, in 1998, Century paid approximately $2.1 million
under such leases, which were at competitive market rates.
Mr. Stout's spouse, Anne L. Meyers, currently serves as Secretary of some
of Century's insurance subsidiaries. The law firm of Anne L. Meyers & Associates
Co., L.P.A., now known as Meyers, Lamanna & Roman, L.P.A., has performed
substantial legal work for Century and its subsidiaries. In 1998, Century paid
$610,250 to Ms. Meyers' firm for services rendered in connection with the
insurance subsidiaries and for merger and acquisition transactions.
Rick L. Burdick, a director of Century, is a partner of Akin, Gump,
Strauss, Hauer & Feld, L.L.P. Akin, Gump performed substantial legal work for
Century during 1998.
29
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(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.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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).
12.1* Statement Regarding Computation of Ratios.
21.1** List of Subsidiaries of Century Business Services, Inc.
23.1* Consent of KPMG LLP
24.1** Powers of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ---------------
* Indicates documents filed herewith.
** Indicates documents previously filed.
30
<PAGE> 32
<TABLE>
<S> <C>
(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 March 31, 1998, filed on
April 15, 1998, as amended by Form 8-K/A, filed on June 10,
1998.
Current Report on Form 8-K dated December 14, 1998.
</TABLE>
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Century has duly caused this Amendment No. 1 to its 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
September 23, 1999
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.
<TABLE>
<S> <C>
/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
*By: /s/ Charles D. Hamm, Jr.
- -----------------------------------------------------
Charles D. Hamm, Jr.
Attorney-in-Fact
</TABLE>
<PAGE> 34
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-7
Schedule I -- Summary of Investments -- Other than
Investments in Related Parties as of December 31, 1998.... F-30
Schedule III -- Supplementary Insurance Information for the
years ended December 31, 1998, 1997 and 1996.............. F-31
Schedule IV -- Reinsurance for the years ended December 31,
1998, 1997 and 1996....................................... F-32
</TABLE>
F-1
<PAGE> 35
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> 36
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<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> 37
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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> 38
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<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> 39
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<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)
------- ------- --------
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-6
<PAGE> 40
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-7
<PAGE> 41
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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
evaluate continually the period of amortization and recoverability of goodwill
based on an evaluation of such factors as the occurrence of a significant
adverse event or change in the environment in which the business operates or if
the expected future net cash flows, undiscounted and without interest, would
become less than the carrying amount of the asset. An impairment loss would be
recorded in the period such determination is made based on the fair value of the
related businesses. Amortization expense from continuing operations was
approximately $4,841,000, $1,334,000 and $33,000 in 1998, 1997 and 1996,
respectively.
F-8
<PAGE> 42
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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 from short duration contracts are recognized as revenue in
proportion to the insurance coverage provided, which is generally ratable over
the terms of the policies. Century has no long-duration contracts from which it
is paid premiums. Unearned premiums are generally computed on the daily pro rata
basis and include amounts relating to assumed reinsurance.
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.
F-9
<PAGE> 43
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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.
F-10
<PAGE> 44
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
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 (of which $18.0 million represented assumed
liabilities and $102.3 million represented the fair value of restricted common
stock), 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 fair
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
during fiscal 1998 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.
F-11
<PAGE> 45
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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>
F-12
<PAGE> 46
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
The amortized cost and estimated fair value of securities available for
sale at December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES 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>
ESTIMATED
AMORTIZED FAIR
COST 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>
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>
ESTIMATED
AMORTIZED FAIR
COST 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>
F-13
<PAGE> 47
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1997 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........................... $ 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 ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES 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-14
<PAGE> 48
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
Realized gains and losses on investments for the years ended December 31
are as follows (in thousands):
<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>
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.
F-15
<PAGE> 49
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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-16
<PAGE> 50
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
The impact of reinsurance is as follows (in thousands):
<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-17
<PAGE> 51
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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>
F-18
<PAGE> 52
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal statutory
income tax rate to income from continuing operations before income taxes, as
follows (in thousands):
<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>
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>
F-19
<PAGE> 53
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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. In addition, under such credit facility, Century cannot pay cash
dividends without the prior written consent of the lender.
Bank debt, notes payable, and capitalized leases, consist of the following
(in thousands):
<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>
F-20
<PAGE> 54
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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
F-21
<PAGE> 55
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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 issue $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.
F-22
<PAGE> 56
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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.
F-23
<PAGE> 57
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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-24
<PAGE> 58
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
F-25
<PAGE> 59
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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>
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.
F-26
<PAGE> 60
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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
======= ======= ======= ========
</TABLE>
F-27
<PAGE> 61
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1997
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
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>
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.
F-28
<PAGE> 62
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- CONTINUED
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-29
<PAGE> 63
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-30
<PAGE> 64
CENTURY BUSINESS SERVICES, INC.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN COLUMN
A COLUMN B COLUMN C 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
COLUMN G COLUMN H COLUMN I COLUMN J 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-31
<PAGE> 65
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
-------- ------------ --------- ------------ ---------- --------------
CEDED TO ASSUMED FROM PERCENTAGE
OTHER OTHER OF AMOUNT
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED 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-32
<PAGE> 1
Century Business Services, Inc. Exhibit 12.1
Computation of Ratios
COMPUTATION OF RATIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net investment income $ 5,381 4,524 3,564
Investments $87,245 80,105 66,632
Cash and accrued investment income 9,501 3,994 6,702
------- ------ ------
Total $96,746 84,099 73,334
======= ====== ======
Average balance $90,423 78,717 67,220 *
Annualized return on investments 6.0% 5.7% 5.3%*
------- ------ ------
- ----------
* Cannot be calculated, as information for 1995 is not presented herein.
</TABLE>
<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, 333-64109 and 333-76179
on Forms S-3; Nos. 333-15413, 333-27825 and 333-40331 on Forms S-3 as amended;
and Nos. 333-40313 and 333-81039 on Forms 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 as amended of Century Business Services, Inc. and
Subsidiaries.
/s/ KPMG LLP
Cleveland, Ohio
September 23, 1999
