SecProbe.io

CORRESP
1
filename1.htm

VIA EDGAR

Paul
Cline

Senior Accountant

United States Securities and
Exchange Commission

Mail Stop

4561 100 S Street, Northeast

Washington, D.C. 20549

RE: CoBiz Inc. Form 10-K filed March 14, 2005, File No. 001-15955

Dear Mr. Cline:

This
letter is in response to the comments raised in your letter dated May 18,
2005 with respect to our Form 10-K filed on March 14, 2005 (Form 10-K).
We have carefully assessed your comments, and are agreeable to augmenting our
disclosures to enhance the overall quality of the disclosures in our filings.
However, after review of our original filing, we believe that we were compliant
with the applicable disclosure requirements.
We therefore respectfully submit that it would be more appropriate to
include the augmented disclosure noted below on a prospective basis in our
future quarterly and annual filings rather than amending past filings.

For
your convenience, we have set out below each of your comments contained in your
May 18, 2005 letter, followed in each case by our responses shown in
bolded text.

Note 2. Acquisitions – page F-18

1.               Please revise for the following for each of
your acquisitions:

a)              Disclose how any contingent consideration is
distributed to the former shareholders.
For example, do the former shareholders receive a pro rata share of the
consideration based on the prior ownership percentage or is some other method
applied?

b)             More specifically disclose the significant terms of
the earn-out agreements, profits interest units and any other contingent consideration.  Specifically discuss the possible range of
payouts based on past performance and future operating estimates.

c)              Discuss the key differences between the profits
interest units and the earn-out provisions.

d)             Disclose the amount of goodwill allocated to each
operating segment.

We have revised the
disclosure and respectfully submit that the following disclosure (marked to
show changes from Form 10-K) will be included in our next quarterly
filing and in subsequent quarterly and annual filings, as appropriate;

Green Manning and Bunch,
Ltd. (“GMB”)

In the
acquisition: (i) the corporate general partner of GMB was merged into
CoBiz GMB, Inc., with the shareholders of the general partner receiving a
combination of cash, shares of CoBiz common stock, and the right to receive
future earn-out payments; and (ii) CoBiz GMB, Inc. acquired all of
the limited partnership interests of GMB in exchange for cash, shares of CoBiz
GMB, Inc. Class B Common Stock (the “CoBiz GMB, Inc. Shares”),
and the right to receive future earn-out payments for the fiscal years 2001 through 2005.
Pursuant to
the merger agreement, the earn-out payments for each of the years 2002 through
2005

June 7, 2005

shall equal a percentage of the excess of GMB’s
earnings before interest, taxes, depreciation, and amortization as defined in
the GMB merger agreement (“GMB EBITDA”), for the year, over a set hurdle rate.  The earn-out payments will be paid in cash to
the former owners of GMB in proportion to their respective ownership immediately
prior to the acquisition.

The merger agreement does not provide for a
minimum earn-out, nor does it cap the total amount that may be paid.  No earn-out payments were required for the
years 2001 through 2003 because GMB EBITDA did not exceed the hurdle rate in
those years.  As of December 31, 2004, the Company
accrued $1,069,000 for the 2004 earn-out payment based on GMB EBITDA of
$3,277,143, which was paid in the first quarter of 2005. The accrued
earn-out payment increased Goodwill. The earn-out payment for 2005 will
depend on the GMB EBITDA for that year.   Management estimates that the 2005 earn-out
payment, which is the final year of the agreement, will range from $0 to
$1,100,000.

Alexander Capital Management Group LLC (“ACMG”)

The terms of the ACMG merger agreement provide for
additional earn-out payments for each of the twelve months ended on March 31,
2004, 2005, and 2006 to be paid to the former shareholders of Alexander
Capital Management Group, Inc. in proportion to their respective ownership
immediately prior to the acquisition.
All earn-out payments shall be made 40% in cash and 60% in CoBiz Stock.

The earn-out payment for the 12 months ended March 31,
2004 was equal to a multiple of  ACMG’s
earnings before interest, taxes, depreciation, and amortization as defined in
the ACMG merger agreement (“ACMG EBITDA”).
The earn-out payments for 2005 and 2006 will be equal to a multiple of
the excess, if any, of each year’s ACMG EBITDA over the ACMG EBITDA for the
previous year.  During 2004, the Company paid $815,000 for
the earn-out period ended on March 31, 2004 based on ACMG EBITDA of
$163,000.  The payment consisted of
$326,000 in cash and 36,988 shares of CoBiz stock valued at $489,000.  In addition, during 2005 the Company paid $2,242,000
for the earn-out period ended on March 31, 2005, based on ACMG EBITDA of $611,430.
The payment consisted of $897,000 in cash and 68,215 shares of CoBiz stock
valued at $1,345,000.  The earn-out
payments increased Goodwill.  An
earn-out payment will be due for the period ending March 31, 2006 only if
the ACMG EBITDA for that period exceeds $611,430.  At the end of the earn-out period, if the
total earn-out payments are less than 2.08 times the total aggregate ACMG
EBITDA during the three-year earn-out period, an additional earn-out payment
will be made equal to such deficiency.   Management
estimates that the 2006 earn-out payment, which is the final year of the
agreement, will range from $808,000 to $2,200,000.

In addition to the earn-out, the former shareholders
of Alexander Capital Management Group, Inc. were issued 200,000 Profits
Interest Units pursuant to a Unitholders’ Agreement, representing a 20%
interest in the profits and losses of ACMG in periods following the acquisition
(but no interest in the value of ACMG as of the date of the acquisition),
which is reflected in the accompanying consolidated statements of condition as
a component of “Accrued interest and other liabilities” and is included in “Other”
non-interest expense in the consolidated statements of income and comprehensive
income.  Unlike the earn-out payments,
which are based on a multiple of earnings for a specified period of time, the
Profits Interest Units entitle the holders to share in the earnings of ACMG for
as long as they are held.   Pursuant to the terms of the Unitholders’
Agreement, under certain circumstances, the Company has the ability to
call  the Profits Interest Units at a
price based on a multiple of the trailing 12 months ACMG EBITDA.  Likewise, the holders of the Profits Interest
Units have, under certain circumstances, the ability to put  the Profits Interest Units to the Company at
a price based on a multiple of the trailing 12 months  ACMG EBITDA.

2

Financial Designs Ltd. (“FDL”)

The terms of the FDL merger agreement provide for
additional earn-out payments for each of the calendar years 2003 through 2007 to
be paid to the former shareholders of FDL in proportion to their respective
ownership immediately prior to the acquisition.  The earn-out payments are payable 50% in cash
and 50% in CoBiz common stock.

The earn-out payment for the 2003 calendar year
was equal to a multiple of FDL’s earnings before interest, taxes, depreciation,
and amortization as defined in the FDL merger agreement (“FDL EBITDA”) for
2003.   During 2004, the Company paid
$18,898,000 for the 2003 earn-out payment owed to the former shareholders of FDL
based on FDL EBITDA of $3,485,439 for 2003, which had previously been
accrued in 2003. The payment consisted of $9,449,000 in cash and 813,948 shares
of CoBiz stock valued at $9,449,000.

No earn-out payment was payable for the 2004
calendar year because FDL EBITDA for 2004 of $1,285,000 did not exceed FDL
EBITDA for 2003.

The earn-out payments for the 2005 to 2007
calendar years are calculated on the excess of each calendar year’s FDL EBITDA
over a hurdle rate which is equal to the highest previously recognized FDL
EBITDA for the 2004 through 2006 calendar years.  The earn-out payments for these calendar
years will be based on a range of multiples, dependent on performance.

The merger agreement does not provide for a
minimum earn-out, nor does it cap the total amount that may be paid.  Therefore, future earn-outs payments will
depend on the financial results of FDL during the earn-out period.  If FDL EBITDA for 2005 were the same as FDL
EBITDA for 2004, then no earn-out payment will be due.   Management estimates that total cumulative
earn-out payments for 2005 to 2007 may range from $677,000 to $3,500,000.

GENERAL

Earn-out payments for the GMB, ACMG and FDL transactions are
treated as additional costs of the acquisitions and recorded as goodwill in
accordance with EITF 95-08 Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination.  Goodwill
arising from these transactions is allocated between the operating segments
expected to benefit from the acquisitions.
See Note 7 “Goodwill and Intangible Assets” for the amount of goodwill
allocated to each operating segment.

2.               Please revise to discuss why you structure your
acquisition agreements using contingent consideration.  In your discussion, please discuss the
benefits and risks.

We believe it
would be most appropriate to expand the discussion on our use of earn-outs
within the MD&A section of our next quarterly filing and in subsequent
quarterly and annual filings, as appropriate. We will add the following
discussion:

The Company has employed a strategy to expand its offering of
fee-based products through the acquisition of entities that complement its
business model.  We will often structure
the purchase price of an acquired entity to include an earn-out, which is a
contingent payment based on achieving future performance levels. Given the
uncertainty of today’s economic climate and the performance challenges it
creates for companies, we feel that the use of earn-outs in acquisitions is an
effective method to bridge the expectation gap between a buyer’s caution and a
seller’s optimism. Earn-outs help to protect buyers from paying a full
valuation up-front without the assurance of the acquisition’s performance;
while it allows sellers to participate in the full value of the company
provided

3

the anticipated performance does occur.  Since the earn-out payments are
determined based on the acquired company’s performance during the earn-out
period, the total payments to be made are not known at the time of the
acquisition.

3.               Supplementally provide us with the relevant sections
of your acquisition agreements and employment contracts with key management
personnel of the acquired companies that pertain to contingent consideration
and tell us how the amounts are calculated.

The requested information has been
provided supplementally.  Please see the
revised disclosure for “Note 2. Acquisitions” above for information on how the
amounts of the contingent consideration are calculated.

4.               Supplementally tell us how you considered the
factors of EITF 95-08 in your determination that the contingent
consideration for each of the acquisitions should be accounted for as
additional costs of the acquisitions and recorded as goodwill.

In evaluating the contingent consideration
paid in our acquisitions, we considered APB No. 16 paragraph 80 (as
amended by SFAS 141 paragraph 28) which states that additional consideration
based on earnings should be included as part of the purchase price.  Specifically, the guidance states that: “Additional
consideration may be contingent on maintaining or achieving specified earnings
levels in future periods. When the contingency is resolved and additional
consideration is distributable, the acquiring corporation should record the
current fair value of the consideration issued or issuable as additional cost
of the acquired company.”

We also considered the factors in EITF 95-08
to evaluate whether contingent consideration should be treated as additional
purchase price or as compensation, including the following factors:

•                  terms of continuing employment;

•                  components of shareholder group;

•                  reasons for contingent
consideration;

•                  formula for determining contingent
consideration; and

•                  other agreements and issues

Each of the acquisitions was
structured such that the earn-out payments will be made regardless of the
employment status of the former owners of the companies.  The Company has certain call rights with
respect to the Profits Interest Units of ACMG; however payments made with
respect to such Profit Interest Units are included in operations and are not
accounted for as additional purchase consideration.  The non-employee shareholders in the ACMG
acquisition participate in the earn-outs in the same manner as the employee
shareholders.  The earn-out payments for
each of the acquisitions described above was structured so that the initial
purchase price was less than the estimated value of the acquired companies with
the intention that additional consideration would be paid in the form of
earn-outs if certain performance criteria were met.  The earn-out payments for each
of the acquisitions described above are based on the earnings of the acquired
company and such payments in each case are made based on the pro rata ownership
of the acquired entity prior to the acquisition.  The earn-out payments are multiples or very
substantial percentages of annual income.
We have been informed by the former owners of FDL and ACMG that they
intend to treat the earn-out payments as additional merger consideration for
tax purposes.  We have no reason to
believe that the former owners of GMB would treat the earn-out payments as
anything other than additional merger consideration for tax purposes.  The compensation structure of the principals
has not significantly changed from the compensation levels prior to the
acquisitions.  As discussed in 2. above,
the earn-out

4

provisions were included to
reduce the risk to CoBiz in the acquisition by initially paying a value at the
low end of a range.  Finally, when the
Company intended to provide a separate profit sharing arrangement (i.e., ACMG
Profits Interest Units) it was isolated from the earn-out provision and not
treated as additional purchase consideration.
Accordingly, we believe that the contingent consideration should be
treated as additional purchase price for the acquisitions.

Note 7. Goodwill and Intangible
Assets – page F-24

5.               Please revise to disclose why you include FDL in the
insurance segment for segment disclosure and goodwill impairment testing.

We have
revised the disclosure and respectfully submit that the following discussion
will be included in our next quarterly filing and in subsequent quarterly and
annual filings, as appropriate:

The insurance
segment includes the activities of FDL and CoBiz Insurance, Inc. FDL
provides employee benefits consulting and brokerage, wealth transfer planning
and preservation for high-net-worth individuals, and executive benefits and
compensation planning. FDL represents individuals and companies in the
acquisition of institutionally priced life insurance products to meet wealth
transfer and business needs. Employee benefit services include assisting
companies in creating and managing benefit programs such as medical, dental,
vision, 401(k), disability, life and cafeteria plans. CoBiz Insurance, Inc.
provides commercial and personal property and casualty insurance brokerage, as
well as risk management consulting services to individuals and small and
medium-sized businesses. The majority of the revenue for both FDL and CoBiz
Insurance is derived from