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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 0-25890
CENTURY BUSINESS SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 22-2769024
- --------------------------------------------- ------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
6480 ROCKSIDE WOODS BOULEVARD SOUTH, SUITE 330, CLEVELAND, OHIO 44131
- --------------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
---------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed since Last Report
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 proceeding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding at
Class of Common Stock October 31, 2002
--------------------- ----------------
Par value $.01 per share 95,743,251
1
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 5
Notes to the Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-19
Item 3. Quantitative and Qualitative Information about Market Risk 19
Item 4. Controls and Procedures 19
PART II . OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 20
Signature 20
Certifications 21-22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
September 30, DECEMBER 31,
2002 2001
--------------------- ---------------------
ASSETS
Cash and cash equivalents $ 9,818 $ 4,340
Restricted cash and funds held for clients 39,115 49,511
Accounts receivable, less allowance for doubtful
accounts of $10,553 and $12,720 106,120 112,666
Notes receivable - current 1,570 2,260
Income taxes recoverable 1,661 2,798
Deferred income taxes 7,488 6,213
Other current assets 6,171 10,320
Assets of discontinued operations 7,741 11,801
--------------------- ---------------------
Total current assets 179,684 199,909
Goodwill, net 155,792 247,225
Property and equipment, net of accumulated
depreciation of $45,109 and $38,014 48,095 52,945
Notes receivable - non-current 7,717 5,000
Deferred income taxes - non-current 14,573 7,427
Other assets 9,350 10,902
--------------------- ---------------------
TOTAL ASSETS $ 415,211 $ 523,408
===================== =====================
LIABILITIES
Accounts payable $ 20,620 $ 21,745
Notes payable and capitalized leases - current 448 1,031
Client fund obligations 28,501 36,108
Accrued expenses 36,424 32,834
Liabilities of discontinued operations 6,704 4,596
--------------------- ---------------------
Total current liabilities 92,697 96,314
Bank debt 25,000 55,000
Notes payable and capitalized leases - non-current 1,213 846
Accrued expenses 458 601
--------------------- ---------------------
TOTAL LIABILITIES 119,368 152,761
--------------------- ---------------------
STOCKHOLDERS' EQUITY
Capital stock 951 949
Additional paid-in capital 439,666 439,136
Accumulated deficit (143,024) (67,906)
Treasury stock (1,308) (1,308)
Accumulated other comprehensive loss (442) (224)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 295,843 370,647
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 415,211 $ 523,408
===================== =====================
See the accompanying notes to the condensed consolidated financial statements.
3
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- --------------------------------
2002 2001 2002 2001
----------------- --------------- --------------- --------------
Revenue $ 116,090 $ 116,838 $ 383,457 $ 404,911
Operating expenses 107,857 110,597 335,379 339,721
----------------- --------------- --------------- --------------
Gross margin 8,233 6,241 48,078 65,190
Corporate general and administrative 4,835 4,888 14,864 14,088
Depreciation and amortization 5,444 10,226 15,382 30,300
----------------- --------------- --------------- --------------
Operating income (loss) (2,046) (8,873) 17,832 20,802
Other income (expense):
Interest expense (501) (1,437) (1,972) (5,822)
Gain (loss) on sale of operations, net (237) 234 873 (1,166)
Other income (expense), net (1,921) 579 (315) 2,954
----------------- --------------- --------------- --------------
Total other expense, net (2,659) (624) (1,414) (4,034)
Income (loss) from continuing operations before
income tax expense (benefit) (4,705) (9,497) 16,418 16,768
Income tax expense (benefit) (552) (1,940) 8,533 12,827
----------------- --------------- --------------- --------------
Income (loss) from continuing operations (4,153) (7,557) 7,885 3,941
Loss from operations of discontinued businesses,
net of tax (50) (1,598) (416) (1,785)
Loss on disposal of discontinued businesses, net of tax (1,905) - (3,141) -
----------------- --------------- --------------- --------------
Income (loss) before cumulative effect of change in
accounting principle (6,108) (9,155) 4,328 2,156
Cumulative effect of a change in accounting principle,
net of tax - - (79,446) -
----------------- --------------- --------------- --------------
Net income (loss) $ (6,108) $ (9,155) $ (75,118) $ 2,156
================= =============== =============== ==============
Earnings (loss) per share:
Basic:
Continuing operations $ (0.04) $ (0.08) $ 0.08 $ 0.04
Discontinued operations (0.02) (0.02) (0.03) (0.02)
Cumulative effect of change in accounting principle - - (0.84) -
----------------- --------------- --------------- --------------
Net income (loss) $ (0.06) $ (0.10) $ (0.79) $ 0.02
================= =============== =============== ==============
Diluted:
Continuing operations $ (0.04) $ (0.08) $ 0.08 $ 0.04
Discontinued operations (0.02) (0.02) (0.03) (0.02)
Cumulative effect of change in accounting principle - - (0.82) -
----------------- --------------- --------------- --------------
Net income (loss) $ (0.06) $ (0.10) $ (0.77) $ 0.02
================= =============== =============== ==============
Basic weighted average shares outstanding 95,109 94,919 95,000 94,908
================= =============== =============== ==============
Diluted weighted average shares outstanding 95,109 94,919 97,233 96,602
================= =============== =============== ==============
See the accompanying notes to the condensed consolidated financial statements.
4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------------
2002 2001
------------------ --------------------
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES $ 37,564 $ 40,363
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired and contingent
consideration on prior transactions - (1,620)
Additions to property and equipment, net (7,617) (8,824)
Proceeds from dispositions of businesses 3,622 11,979
Proceeds from notes receivable 1,593 3
------------------ --------------------
Net cash (used in) provided by investing activities (2,402) 1,538
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 48,900 26,900
Proceeds from notes payable and capitalized leases 595 296
Payment of bank debt (78,900) (76,400)
Payment of notes payable and capitalized leases (811) (2,125)
Proceeds from stock issuances, net of treasury repurchase - (307)
Proceeds from exercise of stock options and warrants, net 532 115
------------------ --------------------
Net cash used in financing activities (29,684) (51,521)
------------------ --------------------
Net increase (decrease) in cash and cash equivalents 5,478 (9,620)
Cash and cash equivalents at beginning of period 4,340 15,970
------------------ --------------------
Cash and cash equivalents at end of period $ 9,818 $ 6,350
================== ====================
See the accompanying notes to the condensed consolidated financial statements.
5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements reflect all adjustments
(consisting of only normal and recurring adjustments) necessary to
present fairly the financial position of Century Business Services,
Inc. and Subsidiaries (CBIZ or the Company) as of September 30, 2002
and December 31, 2001, the results of their operations for the three
and nine-month periods ended September 30, 2002 and 2001, and cash
flows for the nine-month periods ended September 30, 2002 and 2001. The
results of operations for such interim periods are not necessarily
indicative of the results for the full year. The accompanying unaudited
condensed consolidated interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and with instructions to Form 10-Q, and accordingly
do not include all disclosures required by generally accepted
accounting principles. The December 31, 2001 condensed consolidated
balance sheet was derived from CBIZ's audited consolidated balance
sheet, giving effect to certain operations which are being accounted
for as discontinued operations. For further information, refer to the
consolidated financial statements and footnotes thereto included in
CBIZ's annual report on Form 10-K for the year ended December 31, 2001
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates. Certain reclassifications have been made to the 2001
financial statements to conform to the 2002 presentation. Also, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of critical accounting
policies.
2. GOODWILL AND RELATED ADOPTION OF SFAS 142
Effective January 1, 2002, CBIZ adopted the non-amortization provisions
of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangibles: (SFAS 142), and accordingly ceased the amortization
of our remaining goodwill balance. The following table sets forth
reported net income (loss) and earnings per share, as adjusted to
exclude goodwill amortization expense and goodwill impairment (in
thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------- ----------- ------------ -----------
Net income (loss), as reported $ (6,108) $ (9,155) $ (75,118) $ 2,156
Goodwill amortization, net of tax - 5,491 - 16,478
Goodwill impairment, net of tax - - 79,446 -
------------- ----------- ------------ -----------
Net income (loss), as adjusted $ (6,108) $ (3,664) $ 4,328 $ 18,634
============= =========== ============ ===========
Basic earnings per share -
Net income (loss), as reported $ (0.06) $ (0.10) $ (0.79) $ 0.02
Goodwill amortization, net of tax - 0.06 - 0.17
Goodwill impairment, net of tax - - 0.84 -
------------- ----------- ------------ -----------
Net income (loss), as adjusted $ (0.06) $ (0.04) $ 0.05 $ 0.19
============= =========== ============ ===========
Diluted earnings per share -
Net income (loss), as reported $ (0.06) $ (0.10) $ (0.77) $ 0.02
Goodwill amortization, net of tax - 0.06 - 0.17
Goodwill impairment, net of tax - - 0.82 -
------------- ----------- ------------ -----------
Net income (loss), as adjusted $ (0.06) $ (0.04) $ 0.05 $ 0.19
============= =========== ============ ===========
6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(continued)
Also in accordance with SFAS 142, CBIZ finalized the required
transitional impairment tests of goodwill during the second quarter of
2002, and recorded an impairment charge of $88.6 million on a pre-tax
basis. This non-cash charge is non-operational in nature and is
reflected as a cumulative effect of a change in accounting principle,
net of tax benefit of $9.1 million.
Under SFAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. Fair value
is determined at the reporting unit level based on several valuation
techniques, including discounted cash flows, comparable market prices
of similar entities, and earnings and revenue multiples. This
methodology of measuring impairment differs from CBIZ's previous policy
of using undiscounted cash flows on an individual acquisition basis, as
permitted under the accounting standards applicable prior to the
adoption of SFAS 142.
SFAS 142 requires an impairment test to be completed annually,
subsequent to the transitional impairment test applied upon adoption of
the standard. The annual impairment test for all reporting units will
be completed in the fourth quarter of 2002, and every fourth quarter
thereafter.
The changes in the carrying amount of goodwill for the nine-months
ended September 30, 2002 are as follows (in thousands):
Business Benefits & National
Solutions Insurance Practices
(a) (b) (c) Total
------------- ------------- -------------- -------------
Balance as of January 1, 2002 $ 138,006 54,967 54,252 247,225
Less:
Impairment Charge (45,046) (10,863) (32,682) (88,591)
Goodwill associated with
divested operations (2,467) (375) - (2,842)
----------- - ------------- -- -------------- -- -------------
Balance as of September 30,
2002 $ 90,493 43,729 21,570 155,792
=========== = ============= == ============== == =============
(a) Includes one reporting unit.
(b) Included three reporting units at January 1, 2002; subsequently,
one reporting unit has been classified as a discontinued
operation, and any associated goodwill has been reclassed to
Assets of Discontinued operations.
(c) Included nine reporting units at January 1, 2002; subsequently,
one reporting unit has been classified as a discontinued
operation, and any associated goodwill has been reclassed to
Assets of Discontinued operations.
3. CONSOLIDATION AND INTEGRATION CHARGES
Consolidation and integration reserve balances as of December 31, 2001,
activity during the nine-month period ended September 30, 2002, and the
remaining reserve balances as of September 30, 2002, were as follows
(in thousands):
1999 Plan Other Plans
------------------ -------------------
Lease Lease
Consolidation Consolidation
------------------ -------------------
Reserve balance at December 31, 2001......... $ 1,097 $ 2,295
Amounts adjusted to income................ 80 2,056
Payments.................................. (636) (793)
------------------ -------------------
Reserve balance at September 30, 2002........ $ 541 $ 3,558
================== ===================
1999 PLAN
During the fourth quarter of fiscal 1999, CBIZ's Board of Directors
approved a plan (the 1999 Plan) to consolidate several operations in
multi-office markets and integrate certain back-office functions into a
shared-services center. The plan included the consolidation of at least
60 office locations, the elimination of more than 200 positions
(including Corporate), and the divestiture of four small, non-core
businesses.
7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(continued)
During the nine months ended September 30, 2001, CBIZ reduced
approximately $0.5 million of accruals related to noncancellable lease
obligations, due to the fact that the consolidations in the San Jose
and St. Louis markets would not be completed within the original
timeframe, offset by the addition of $0.1 million of accruals to cover
lease costs under the original plan not subleased in the original time
frame. CBIZ also reduced approximately $0.1 million of accruals related
to severance due to the accrual being higher than actual severance
expense for those consolidations that had been completed. During the
nine months ended September 30, 2002, CBIZ increased the lease accrual
related to the 1999 plan by $0.1 million based on changes in sublease
assumptions for the Atlanta market.
OTHER PLANS
In addition to the consolidation activity described above that relates
to the 1999 Plan, CBIZ has incurred expenses related to noncancellable
lease obligations in Columbia, Philadelphia, Kansas City, and San
Diego. For the nine months ended September 30, 2002, CBIZ recorded a
consolidation and integration charge of $1.7 million related to the
consolidation in Kansas City and $0.1 million related to the
consolidation in San Diego pursuant to exit plans.
In addition to the establishment of these lease accruals, certain
consolidation expenses were incurred that are required to be expensed
as incurred. Consolidation and integration charges incurred for the
three and nine-months ended September 30, 2002 and 2001 were as follows
(in thousands):
Three Months Ended September 30,
---------------------------------------------
2002 2001
------------ ------------- ---------------
Corporate
Operating Operating G&A
expense expense expense
------------ ------------- ---------------
CONSOLIDATION AND INTEGRATION CHARGES NOT IN
1999 PLAN:
Severance expense $ 4 189 -
Lease consolidation and abandonment 371 907 -
Other consolidation charges 117 349 -
------------ ------------- ---------------
Subtotal $ 492 1,445 -
CONSOLIDATION AND INTEGRATION CHARGES IN 1999
PLAN:
Adjustment to lease accrual - 1 -
Adjustment to severance accrual - - 11
------------ ------------- ---------------
Total consolidation and
integration charges $ 492 1,446 11
============ ============= ===============
Nine Months Ended September 30,
---------------------------------------------
2002 2001
------------ ------------- ---------------
Corporate
Operating Operating G&A
expense expense expense
------------ ------------- ---------------
CONSOLIDATION AND INTEGRATION CHARGES NOT IN
1999 PLAN:
Severance expense $ 33 226 93
Lease consolidation and abandonment 2,799 989 -
Other consolidation charges 449 596 -
------------ ------------- ---------------
Subtotal $ 3,281 1,811 93
CONSOLIDATION AND INTEGRATION CHARGES IN 1999
PLAN:
Adjustment to lease accrual 80 (380) -
Adjustment to severance accrual - (52) (25)
------------ ------------- ---------------
Total consolidation and
integration charges $ 3,361 1,379 68
============ ============= ===============
8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(continued)
4. CONTINGENCIES
CBIZ is from time to time subject to claims and suits arising in the
ordinary course of business. CBIZ is involved in certain legal
proceedings as described in Part I, "Item 3 - Legal Proceedings" in our
Annual Report on Form 10-K for the year ended December 31, 2001. There
have been no significant developments in such claims or suits during
the first nine months of 2002, other than an appeal of the dismissal of
certain class-action lawsuits discussed below.
Since September 1999, seven purported stockholder class-action lawsuits
were filed against CBIZ and certain of its current and former directors
and officers, as reflected in the Form 10-K statement filed for the
year ended December 31, 2001, and were consolidated as In Re Century
Business Services Securities Litigation, Case No. 1:99CV2200, in the
United States District Court for the Northern District of Ohio. The
plaintiffs alleged that the named defendants violated certain
provisions of the Securities Exchange Act of 1934 and certain rules
promulgated thereunder in connection with certain statements made
during various periods from February 1998 through January 2000 by,
among other things, improperly amortizing goodwill and failing
adequately to monitor changes in operating results. The consolidated
complaint sought damages in an unspecified amount. The United States
District Court dismissed the consolidated actions and the matter is no
longer pending against CBIZ. Plaintiffs have appealed the dismissal and
the case has not yet been briefed.
CBIZ and the named officer and director defendants deny all allegations
of wrongdoing made against them in these actions and intend to
vigorously defend each of these lawsuits or appeals. Although the
ultimate outcome of such litigation is uncertain, based on the
allegations contained in the complaints, management does not believe
that these lawsuits or appeals will have a material adverse effect on
the financial condition, results of operations or cash flows of CBIZ.
5. EARNINGS (LOSS) PER SHARE
For the periods presented, CBIZ presents both basic and diluted
earnings (loss) per share. The following data shows the amounts used in
computing earnings (loss) per share and the effect on the weighted
average number of dilutive potential common shares (in thousands).
Included in potential dilutive common shares for 2001 are contingent
shares, which represent shares issued and placed in escrow that will
not be released until certain performance goals have been met. As of
September 30, 2002, there were no contingent shares remaining, as all
shares related to acquisition "earn-outs" have been released.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -------------------------------------
2002 2001 2002 2001
---------------- --------------- ---------------- -----------------
BASIC
Weighted average common
shares 95,109 94,919 95,000 94,908
---------------- --------------- ---------------- -----------------
DILUTED
Options (a) - - 2,233 1,633
Contingent shares (a) - - - 61
Total ---------------- --------------- ---------------- -----------------
95,109 94,919 97,233 96,602
================ =============== ================ =================
(a) The effect of the incremental shares from options and contingent
shares of 1,829 and 2,614 for the three months ended September 30,
2002, and 2001, respectively, have been excluded from diluted
weighted average shares, as the net loss from continuing
operations for the period would cause the incremental shares to be
antidilutive.
9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(continued)
6. ACQUISITIONS
For the nine-months ended September 30, 2001, CBIZ purchased one
business solutions firm, which was accounted for under the purchase
method of accounting. Accordingly, the operating results of the
acquired company have been included in the accompanying
condensed consolidated financial statements since the date of
acquisition. The aggregate purchase price of this acquisition was
approximately $0.3 million in cash. The excess of the purchase price
over fair value of the net assets acquired (goodwill) was
approximately $0.1 million, and was being amortized over a 15-year
period, prior to the adoption of SFAS 142. As a result of the nature
of the assets and liabilities of the business acquired, there were no
material identifiable intangible assets or liabilities.
7. DIVESTITURES
For the nine months ended September 30, 2002, CBIZ either divested or
sold 15 business units, of which five have been classified as
discontinued operations and are discussed separately in footnote 9,
"Discontinued Operations," and the remaining ten units are discussed
below.
During the third quarter of 2002, CBIZ elected to close one non-core
business operation which resulted in a pretax loss of $0.2 million. For
the nine months ended September 30, 2002, CBIZ completed the sale of
seven non-core business operations for an aggregate price of $6.9
million and closed three non-core business operation, which resulted
in a pretax gain of $0.9 million. Since these divestitures did not
meet the criteria as discontinued operations under SFAS 144
"Accounting for the Impairment of or Disposal of Long-Lived Assets",
the net gain or loss associated with these transactions is included
in income from continuing operations in the accompanying condensed
consolidated statements of operations.
During the third quarter of 2001, CBIZ completed the sale of a small
insurance operation for an aggregate price of $0.2 million in cash and
notes, resulting in a pretax gain of $0.2 million. For the nine months
ended September 30, 2001, CBIZ completed the sale of seven non-core
business operations for an aggregate price of $12.0 million and closed
one non-core business, which resulted in a pretax loss of $1.2 million.
The aforementioned gains and losses have been included in gain (loss)
on sale of operations in the accompanying condensed consolidated
statements of operations.
8. SEGMENT REPORTING
CBIZ business units are aggregated into three reportable segments:
Business Solutions; Benefits and Insurance; and National Practices.
Segment information for the three and nine-month periods ended
September 30, 2002 and 2001 are as follows (in thousands):
------------------------------------------------------------------------------
For the Three Months Ended September 30, 2002
------------------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
------------ ------------ -------------- ----------- -------------
Revenue $ 44,486 $ 34,423 $ 37,181 $ - $ 116,090
Operating expenses 43,517 29,361 33,672 1,307 107,857
---------- ------------ -------------- ----------- -------------
Gross margin 969 5,062 3,509 (1,307) 8,233
Corporate general and
administrative - - - 4,835 4,835
Depreciation and amortization 1,274 878 973 2,319 5,444
---------- ------------ -------------- ----------- -------------
Operating income (loss) (305) 4,184 2,536 (8,461) (2,046)
Interest expense (13) (17) (11) (460) (501)
Loss on sale of operations,
net - - - (237) (237)
Other income (expense), net 89 148 (870) (1,288) (1,921)
---------- ------------ -------------- ----------- -------------
Income (loss) from continuing
operations, before taxes $ (229) $ 4,315 $ 1,655 $ (10,446) $ (4,705)
========== ============ ============== =========== =============
10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
continued)
------------------------------------------------------------------------------
For the Three Months Ended September 30, 2001
------------------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
------------ ------------ -------------- ----------- -------------
Revenue $ 49,851 $ 31,875 $ 35,112 $ - $ 116,838
Operating expenses 48,718 28,574 30,868 2,437 110,597
---------- ------------ -------------- ----------- -------------
Gross margin 1,133 3,301 4,244 (2,437) 6,241
Corporate general and
administrative - - - 4,888 4,888
Depreciation and amortization 1,121 938 814 7,353 10,226
---------- ------------ -------------- ----------- -------------
Operating income (loss) 12 2,363 3,430 (14,678) (8,873)
Interest expense (16) (25) (18) (1,378) (1,437)
Gain on sale of operations,
net - - - 234 234
Other income, net 185 17 340 37 579
---------- ------------ -------------- ----------- -------------
Income (loss) from continuing
operations, before taxes $ 181 $ 2,355 $ 3,752 $ (15,785) $ (9,497)
========== ============ ============== =========== =============
------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2002
------------------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
------------ ------------ -------------- ----------- -------------
Revenue $ 168,896 $ 108,392 $ 106,169 $ - $ 383,457
Operating expenses 140,758 90,557 97,498 6,566 335,379
---------- ------------ -------------- ----------- -------------
Gross margin 28,138 17,835 8,671 (6,566) 48,078
Corporate general and
administrative - - - 14,864 14,864
Depreciation and amortization 3,647 2,793 2,629 6,313 15,382
---------- ------------ -------------- ----------- -------------
Operating income 24,491 15,042 6,042 (27,743) 17,832
Interest expense (40) (59) (45) (1,828) (1,972)
Gain on sale of operations,
net - - - 873 873
Other income (expense), net 247 266 (432) (396) (315)
---------- ------------ -------------- ----------- -------------
Income from continuing
operations, before taxes $ 24,698 $ 15,249 $ 5,565 $ (29,094) $ 16,418
========== ============ ============== =========== =============
------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2001
------------------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
------------ ------------ -------------- ----------- -------------
Revenue $ 186,837 $ 108,119 $ 109,955 $ - $ 404,911
Operating expenses 149,995 86,095 98,261 5,370 339,721
---------- ------------ -------------- ----------- -------------
Gross margin 36,842 22,024 11,694 (5,370) 65,190
Corporate general and
administrative - - - 14,088 14,088
Depreciation and amortization 3,272 2,755 2,426 21,847 30,300
---------- ------------ -------------- ----------- -------------
Operating income 33,570 19,269 9,268 (41,305) 20,802
Other income (expense):
Interest expense (61) (107) (59) (5,595) (5,822)
Loss on sale of operations,
net - - - (1,166) (1,166)
Other income (expense), net 643 828 1,372 111 2,954
---------- ------------ -------------- ----------- -------------
Income from continuing
operations, before taxes $ 34,152 $ 19,990 $ 10,581 $ (47,955) $ 16,768
========== ============ ============== =========== =============
11
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(continued)
9. DISCONTINUED OPERATIONS
CBIZ adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," effective January 1, 2002. SFAS 144 addresses
financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, as well as the
accounting and reporting of discontinued operations.
During the third quarter, CBIZ adopted formal plans to divest two
additional business units, which were no longer part of CBIZ's
strategic long-term growth objectives. CBIZ recorded a loss on sale,
net of tax, of $1.9 million based on the estimated sales proceeds for
one of these units. The divestiture of the second unit is expected
to result in a gain, which will be recognized when the transaction is
complete. This transaction is expected to be completed during the
fourth quarter, upon converting the recordkeeping of approximately
340 daily-valued retirement plans to BISYS' recordkeeping platform.
During the first nine months of 2002, CBIZ adopted formal plans to
close two small business units and divest three additional business
units, which were no longer part of CBIZ's strategic long-term growth
objectives. The business units are reported as discontinued operations
and the net assets and liabilities and results of operations are
reported separately in the unaudited condensed consolidated financial
statements. In addition, CBIZ recorded a loss on the disposal of
discontinued operations of $1.9 million and $3.1 million, net of tax
for the three and nine-month periods ended September 30, 2002,
respectively.
Revenues from the discontinued operations for the three-month period
ended September 30, 2002 and 2001 were $1.7 million and $1.1 million,
respectively. Revenues from the discontinued operations for the
nine-month period ended September 30, 2002 and 2001 were $5.9 million
and $8.1 million, respectively.
At September 30, 2002 and December 31, 2001, the net assets and
liabilities of the five business units classified of discontinued
operations consisted of the following (in thousands):
September 30, December 31,
2002 2001
------------------ -------------------
Accounts receivable, net $ 5,795 $ 8,367
Property and equipment, net 912 1,244
Other assets 1,034 2,190
------------------ -------------------
Assets of discontinued operation 7,741 11,801
================== ===================
Accounts payable 924 369
Accrued expenses 5,780 4,227
------------------ -------------------
Liabilities of discontinued operation $ 6,704 $ 4,596
================== ===================
10. SUBSEQUENT EVENTS
On October 4, 2002, CBIZ completed the acquisition of Benicor
Associates, Inc. which provides benefit services, including group
insurance, benefits administration and outsourcing, COBRA and flexible
spending administration, executive benefits and retirement planning in
the Maryland and Washington, D.C. areas.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Century Business Services, Inc. (CBIZ or the Company) is a diversified services
company, which acting through its subsidiaires provides professional outsourced
business services to small and medium-sized companies, as well as individuals,
government entities, and not-for-profit enterprises predominantly throughout the
United States. CBIZ provides integrated services in the following areas:
accounting and tax; employee benefits; wealth management; property and casualty
insurance; payroll; information systems consulting; HR consulting; government
relations; commercial real estate; wholesale insurance; healthcare consulting;
medical practice management; worksite marketing; valuation; litigation
advisory; and capital advisory services.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Revenues
Total revenue decreased to $116.1 million for the three-month period ended
September 30, 2002, from $116.8 million for the comparable period in 2001, a
decrease of $0.7 million, or 0.6%. The decrease in revenue attributable to
divestitures was $3.3 million for the three-month period ended September 30,
2002, which was offset by positive growth in same unit revenue for the quarter.
For business units with a full period of operations for the three-month periods
ended September 30, 2002 and 2001, revenue increased $2.6 million, or 2.3%.
Revenue growth in the benefits and insurance segment has been strong given the
increased commissions related to increasing premiums and the hardening of the
market in 2002, while the current economic conditions continue to affect the
consulting work and special projects in the Business Solutions segment.
Expenses
Operating expenses decreased to $107.9 million for the three-month period ended
September 30, 2002, from $110.6 million for the comparable period in 2001, a
decrease of $2.7 million, or 2.5%. As a percentage of revenue, operating
expenses for the three-month period ended September 30, 2002 were 92.9% compared
to 94.7% for the comparable period in 2001. The decrease is primarily
attributable to the divestiture of low-margin businesses, as well as the
effects of expense reductions initiated in the second quarter of 2002 to
help bring compensation expenses back in line with revenue levels. As a result
of the expense reductions and continuing consolidation activities, CBIZ
incurred severance costs and restructuring costs of $0.7 million for the
three-month period ended September 30, 2002, compared to severance costs and
restructuring costs of $1.5 million for the comparable period in 2001. These
decreases in expenses were offset by a $1.3 million charge related to a
valuation and obsolescence adjustment for inventory carried to support several
IT network maintenance contracts that have been recently terminated.
Corporate general and administrative expenses were $4.8 million for the
three-month period ended September 30, 2002 compared to $4.9 million for the
three-month period ended September 30, 2001. While total corporate general and
administrative costs remain flat, compensation expense decreased by $0.4 million
from the same period a year ago, which was offset by an increase in legal
expenditures of $0.6 million over the same period a year ago. Corporate general
and administrative expenses represent 4.2% of total revenue for the three-month
periods ended September 30, 2002 and 2001.
Depreciation and amortization expense decreased to $5.4 million for the
three-month period ended September 30, 2002, from $10.2 million for the
comparable period in 2001, a decrease of $4.8 million, or 46.8%. The decrease is
primarily attributable to a decrease in goodwill amortization of $5.5 million
for the three-months ended September 30, 2002, resulting from the adoption of
SFAS No. 142, which ceased the amortization of goodwill effective January 1,
2002. The decrease is offset by an increase in depreciation and amortization
expense related to $0.4 million of accelerated amortization expense of deferred
debt costs in connection with entering into a new credit facility and $0.3
million related to additional capital expenditures made since September 30,
2001. The increase in capital expenditures and depreciation is primarily
driven by consolidation activities and the growth of our medical management
practice.
Interest expense decreased to $0.5 million for the three-month period ended
September 30, 2002, from $1.4 million for the comparable period in 2001, a
decrease of $0.9 million, or 65.1%. The decrease is the result of both lower
average outstanding balances on the bank debt and a lower average interest rate
in 2002. The average bank debt balance was $30.2 million in the third quarter of
2002, compared with an average bank debt balance of $74.0 million
13
for the same period of 2001, and the weighted average interest rate in the third
quarter of 2002 was 5.7%, compared to 7.1% for the same period of 2001.
Net loss on sale of operations was $0.2 million for the three-month period ended
September 30, 2002, and was related to the decision to close a non-core business
operation. Net gain on sale of operations was $0.2 million for the three-month
period ended September 30, 2001, and was related to the sale of a small
insurance operation.
Other expense, net was $1.9 million for the three-month period ended September
30, 2002, as compared to other income, net of $0.6 million for the comparable
period in 2001, representing a decrease of $2.5 million. Other income (expense),
net is comprised primarily of interest income earned in CBIZ's payroll business,
gains and losses on the sale of assets, charges for legal reserves and
settlements, and miscellaneous income, such as contingent royalties from
previous divestitures. The decrease in other income (expense), net is primarily
attributable to $2.4 million charge related to the write down of notes and
investments the company previously made in high-tech start-up ventures and a
decrease in interest income of $0.3 million due to lower interest rates in 2002.
CBIZ recorded an income tax benefit from continuing operations of $0.6 million
for the three-month period ended September 30, 2002, compared to a $1.9 million
benefit for the comparable period in 2001. The effective tax rate was 11.7% for
the three-month period ended September 30, 2002, compared to 20.4% for the
comparable period in 2001. Income taxes are provided based on CBIZ's anticipated
annual effective rate, which is 52.0% for 2002, compared to 76.5% for 2001. The
estimated annual effective rate increased from 43% to 52.0% during the quarter
due to changes in estimated annualized pretax income. The estimated annual
effective rate is subject to change based on changes in annual estimated pretax
income, revisions to positions taken as a result of further analysis, or changes
mandated as a result of audits by taxing authorities. For further discussion
regarding the annual effective income tax rate, see the discussion below
regarding income tax expense (benefit) for the nine months ended September 30,
2002.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Revenues
Total revenues decreased to $383.5 million for the nine-month period ended
September 30, 2002, from $404.9 million for the comparable period in 2001, a
decrease of $21.5 million, or 5.3%. The decrease in revenue attributable to
divestitures was $22.2 million for the nine-month period ended September 30,
2002. For business units with a full period of operations for the nine-month
periods ended September 30, 2002 and 2001, revenue increased $0.8 million, or
0.2%.
Expenses
Operating expenses decreased to $335.4 million for the nine-month period ended
September 30, 2002, from $339.7 million for the comparable period in 2001, a
decrease of $4.3 million, or 1.3%. As a percentage of revenue, operating
expenses for the nine-month period ended September 30, 2002 were 87.5% compared
to 83.9% for the comparable period in 2001. The decrease is primarily
attributable to the divestiture of low-margin businesses, as well as the
effects of expense reductions initiated in the second quarter of 2002 to help
bring the compensation expense back in line with revenue. These decreases were
offset by increases in severance, restructuring, and inventory adjustments. As a
result of expense reductions and continuing consolidation activities, CBIZ
incurred severance costs and restructuring costs of $4.0 million for the
nine-month period ended September 30, 2002, compared to severance costs and
restructuring costs of $1.5 million for the comparable period in 2001. In
addition, the expense reductions were offset by a $1.3 million expense charge
related to a valuation and obsolescence adjustment for inventory carried to
support several IT network maintenance contracts that have been recently
terminated.
Corporate general and administrative expenses increased to $14.9 million for the
nine-month period ended September 30, 2002, from $14.1 million for the
comparable period in 2001, an increase of $0.8 million. Corporate general and
administrative represented 3.9% of total revenue for the nine-month period ended
September 30, 2002, compared to 3.5% for the comparable period in 2001. The
increase in corporate general and administrative cost was primarily driven by an
increase in legal costs of $1.5 million, due to the cost to pursue cases
concerning non-competition violations by former employees, insurance coverage
issues, and other cases in which CBIZ is involved, offset by lower compensation
and other related expenses.
14
Depreciation and amortization expense decreased to $15.4 million for the
nine-month period ended September 30, 2002, from $30.3 million for the
comparable period in 2001, a decrease of $14.9 million, or 49.2%. The decrease
is primarily attributable to the decrease in goodwill amortization of $16.5
million for the nine-months ended September 30, 2002 resulting from the adoption
of SFAS No. 142, which ceased the amortization of goodwill effective January 1,
2002. The decrease is offset by an increase in depreciation and amortization
expense of $0.4 million related to accelerated amortization expense of deferred
debt costs in connection with entering into a new credit facility and $1.1
million related to additional capital expenditures made since September 30,
2001. The increase in capital expenditures and depreciation is primarily driven
by consolidation activities and the growth of our medical management practice.
Interest expense decreased to $2.0 million for the nine-month period ended
September 30, 2002, from $5.8 million for the comparable period in 2001, a
decrease of $3.8 million, or 66.1%. The decrease is the result of both lower
average outstanding debt balances and a lower average interest rate in 2002. The
average debt balance was $43.6 million for the first nine months of 2002,
compared with an average debt balance of $92.3 million for the same period in
2001. The weighted average interest rate for the first nine months of 2002 was
5.6%, compared to 7.9% for the same period in 2001.
Net gain on sale of operations was $0.9 million for the nine-month period ended
September 30, 2002 related to the sale of eight non-core business units and the
closing of two non-core business operations. Net loss on sale of operations was
$1.2 million for the nine-month period ended September 30, 2001, and was related
to the sale of six non-core business units, the closure of one additional
non-core business unit and the sale of a book of business.
Other expense, net was $0.3 million for the nine-month period ended September
30, 2002, from $3.0 million other income, net, for the comparable period in
2001, a decrease of $3.3 million, or 110.7%. Other income (expense), net is
comprised primarily of interest income earned at CBIZ's payroll business, gains
and losses on the sale of assets, charges for legal reserves and settlements,
and miscellaneous income, such as contingent royalties from previous
divestitures. The decrease in other income (expense), net is primarily
attributable to a $2.4 million charge related to the write down of notes and
investments the company previously made in high-tech start-up ventures and a
decrease in interest income of $1.3 million due to lower interest rates in 2002.
CBIZ recorded income taxes from continuing operations of $8.5 million for the
nine-month period ended September 30, 2002 compared to $12.8 million for the
comparable period in 2001. The effective tax rate was 52.0% for the nine-month
period ended September 30, 2002 compared 76.5% for the comparable period in
2001. Income taxes are provided based on CBIZ's anticipated annual effective
rate. The estimated annual effective rate is subject to change based on changes
in annual estimated pretax income, revisions to positions taken as a result of
further analysis, or changes mandated as a result of audits by taxing
authorities The effective tax rate for the nine-months ended September 30, 2002,
is higher than the statutory federal and state tax rates of approximately 40%
due to permanent differences, such as the write-down of non-deductible goodwill
upon disposition of businesses. The effective tax rate for the comparable period
in 2001 is higher than the statutory federal and state tax rates of
approximately 40%, primarily due to the significant amount of goodwill
amortization expense, the majority of which is not deductible for tax purposes.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
During the first nine months of 2002, CBIZ adopted formal plans to close two
small business units and divest two additional business units in addition to
completing the sale of a non-core business unit in our Business Solutions
segment, which were no longer part of CBIZ's strategic long-term growth
objectives. The business units were reported as discontinued operations and the
net assets and liabilities and results of operations are reported separately in
the unaudited condensed consolidated financial statements. Based on the
estimated cost of closure and purchase price CBIZ recorded a loss on disposal
from discontinued operations, net of tax, of $1.9 million and $3.1 million for
the three and nine-months ended September 30, 2002. Revenues from the
discontinued operations for the three and nine-month periods ended September 30,
2002 were $1.7 million and $5.9 million respectively, as compared to $1.1
million and $8.1 million for the comparable period in 2001.
FINANCIAL CONDITION
Total assets decreased to $415.2 million at September 30, 2002, from $523.4
million at December 31, 2001, primarily attributable to the decrease in goodwill
and restricted cash and funds held for clients. Goodwill decreased by $91.4
million for the nine-months ended September 30, 2002, from $247.2 million to
$155.8 million,
15
primarily due to the $88.6 million impairment charge (pretax) recorded upon the
adoption of SFAS No. 142. Total liabilities decreased by approximately $33.4
million, primarily due to the decrease in bank debt of $30.0 million, and by a
decrease in client fund obligations of $7.6 million. Total stockholders' equity
decreased approximately $74.8 million, primarily due to the goodwill impairment
charge taken under the adoption of SFAS No. 142 and losses of $3.6 million from
discontinued operations, offset by net income from continuing operations for the
first nine months of 2002 of $7.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $5.5 million to $9.8 million at September
30, 2002, from $4.3 million at December 31, 2001. Net cash provided by
continuing operating activities for the nine months ended September 30, 2002 was
$37.6 million, as compared to $40.4 million in 2001, a decrease of $2.8 million.
In line with management's objective of reducing debt, net cash provided by
operating activities, combined with proceeds from divestitures, was the
principal source of funds used to reduce CBIZ's bank debt.
Cash used in investing activities of $2.4 million during the nine months ended
September 30, 2002, consisted primarily of proceeds from the disposition of nine
businesses for $3.6 million, offset by cash used to fund capital expenditures of
$7.6 million. Capital expenditures consisted of leasehold improvements and
equipment in connection with the consolidation of offices, growth in the medical
billing practice, and equipment purchases in relation to normal replacement.
During the nine months ended September 30, 2002, cash used in financing
activities consisted of a net reduction in the credit facility of $30.0 million
and net payments of $0.8 million used toward the reduction of notes payable and
capitalized leases. During the last twelve months, CBIZ reduced bank debt by
$33.0 million, from $68.0 million at September 30, 2001 to $25.0 million at
September 30, 2002.
SOURCES AND USES OF CASH
CBIZ's principal source of net operating cash is derived from the collection of
fees from professional services rendered to its clients and commissions earned
in the areas of accounting, tax, valuation and advisory services, benefits
consulting and administration services, insurance, human resources and payroll
solutions, capital advisory, retirement and wealth management services and
technology solutions.
On September 26, 2002 CBIZ entered into a new senior secured credit agreement
(credit agreement) with a consortium of four banks. The new $73.0 million
facility carries an option to increase to $80.0 million and allows for the
allocation of funds for strategic initiatives, including acquisitions and the
repurchase of stock. CBIZ expects to use the facility for working capital,
internal growth initiatives, and its acquisition program. The facility has a
three year term with an expiration date of September 2005.
Under the new credit agreement, CBIZ is subject to a monthly borrowing base
related to accounts receivable and work-in-process, and is required to meet
certain financial covenants. These covenants require CBIZ to maintain (i)
minimum tangible net worth; (ii) maximum leverage ratio; and (iii) minimum fixed
charge coverage ratio. CBIZ is in compliance with its covenants as of September
30, 2002.
At September 30, 2002, CBIZ had $25.0 million outstanding under its credit
facility. Management believes that the available funds from the credit facility,
along with cash generated from operations, will be sufficient to meet its
liquidity needs in the foreseeable future. Management also expects to continue
to further reduce the outstanding balance on the credit facility with cash
generated from operations.
INTEREST RATE RISK MANAGEMENT
CBIZ entered into an interest rate swap agreement in the third quarter of 2001
to reduce the impact of potential rate increases on variable rate debt through
its credit facility. The interest rate swap has a notional amount of $25
million,
16
a fixed LIBOR rate of 3.58%, and a maturity date of August 2003. CBIZ accounts
for the interest rate swap as a cash flow hedge, whereby the fair value of the
interest rate swap is reflected as an asset or liability in the accompanying
consolidated balance sheet. The interest rate swap (hedging instrument) matches
the notional amount, interest rate index and re-pricing dates as those that
exist under the variable rate debt through its credit facility (hedged item).
When the interest rate index is below the fixed rate LIBOR, the change in fair
value of the instrument represents a change in intrinsic value, which is an
effective hedge. This portion of change in value will be recorded as other
comprehensive income (loss). For the nine months ended September 30, 2002, the
change in fair value resulted in a loss of approximately $0.4 million, which is
recorded as other comprehensive income (loss).
CRITICAL ACCOUNTING POLICIES
Accounting policies that management believes are most critical to CBIZ's
financial condition and operating results are discussed below.
REVENUE RECOGNITION
CBIZ offers a vast array of products and outsourced business services to its
clients. Those services are delivered through three segments. A description of
revenue recognition, as it relates to those segments, is provided below:
BUSINESS SOLUTIONS - Revenue consists primarily of fees for accounting services,
preparation of tax returns and consulting services. Revenues are recorded in the
period in which they are earned. CBIZ bills clients based upon a predetermined
agreed upon fixed fee or actual hours incurred on client projects at expected
net realizable rates per hour, plus any out-of-pocket expenses. The cumulative
impact on any subsequent revision in the estimated realizable value of unbilled
fees for a particular client project is reflected in the period in which the
change becomes known.
BENEFITS & INSURANCE - Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans.
Commissions relating to brokerage and agency activities whereby CBIZ has primary
responsibility for the collection of premiums from insureds are generally
recognized as of the latter of the effective date of the insurance policy or the
date billed to the customer. Commissions to be received directly from insurance
companies are generally recognized when the amounts are determined. Life
insurance commissions are recorded on the accrual basis. Commission revenue is
reported net of sub-broker commissions. Contingent commissions are generally
recognized when received. Fee income is recognized as services are rendered.
NATIONAL PRACTICES - The business units that comprise this division offer a
variety of services. A description of revenue recognition associated with the
primary services is provided below:
- - Mergers & Acquisitions and Capital Advisory - Revenue associated with
non-refundable retainers are recognized on a straight-line basis over the
life of the engagement. Revenue associated with success fee transactions
are recognized when the transaction is completed.
- - Technology Consulting - Revenue associated with hardware and software sales
are recognized upon delivery and acceptance. Revenue associated with
installation and service agreements are recognized as services are
performed. Consulting revenue is recognized on an hourly or per diem fee
basis.
- - Valuation and Property Tax - Revenue associated with retainer contracts are
recognized on a straight-line basis over the life of the contract, which is
generally twelve months. Revenue associated with contingency arrangements
is recognized once written notification is received from an outside third
party (e.g., assessor in the case of a property tax engagement)
acknowledging that the revenue cycle has been completed.
- - Physician Practice Management - Revenue is recognized when collections are
received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
The preparation of condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Specifically, management must make
estimates of the collectability of our accounts receivable,
17
including work-in-progress (unbilled accounts receivable), related to current
period service revenue. Management analyzes historical bad debts, client
credit-worthiness, and current economic trends and conditions when evaluating
the adequacy of the allowance for doubtful accounts and the collectibility of
notes receivable. Significant management judgments and estimates must be made
and used in connection with establishing the allowance for doubtful accounts in
any accounting period. Material differences may result if management made
different judgments or utilized different estimates. During the third quarter of
2002, CBIZ recorded charges of approximately $0.8 million related to the
impairment of a note receivable related to the sale of the environmental
business in 1997. Our accounts receivable balance was $106.1 million, net of
allowance of $10.6 million, and our notes receivable balance was $9.3 million as
of September 30, 2002.
VALUATION OF GOODWILL
Effective January 1, 2002, CBIZ adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," and
accordingly, ceased amortization of our remaining goodwill balance. During the
second quarter of 2002, CBIZ completed the process of evaluating our goodwill
for impairment using the new fair value impairment guidelines of SFAS 142. This
change to a new method of accounting for goodwill resulted in a non-cash
impairment charge of $88.6 million on a pretax basis, which was recorded as a
cumulative effect of a change in accounting principle. At September 30, 2002,
CBIZ had approximately $155.8 million of goodwill associated with prior
acquisitions.
VALUATION OF INVESTMENTS
CBIZ has certain investments in privately held companies that are currently in
their start-up or development stages and are included in "other assets" in the
accompanying condensed consolidated balance sheets. These investments are
inherently risky as the market for the technologies or products they have under
development are typically in the early stages. The value of these investments is
influenced by many factors, including the operating effectiveness of these
companies, the overall health of the companies' industries, the strength of the
private equity markets and general market conditions. During the third quarter
of 2002, CBIZ recorded charges of approximately $1.6 million related to the
impairment of certain investments held. Although the market value of these
investments is not readily determinable, management believes their current fair
values approximate their carrying values as of September 30, 2002. In light of
the circumstances noted above, particularly with respect to the current economic
environment, it is possible that the fair value of these investments could
decline in future periods, and further impairment could occur.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as liabilities
when it is probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Disclosure is required when there is a reasonable
possibility that the ultimate loss will exceed the recorded provision.
Contingent liabilities are often resolved over long time periods. Estimating
probable losses requires analysis that often depends on judgment about potential
actions by third parties.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the consolidated financial statements. Those policies are
described in Note 1 to the consolidated financial statements contained in our
annual report on Form 10-K for the year ended December 31, 2001.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002, and is not expected to have a significant
impact on our financial position and results of operations.
FORWARD-LOOKING STATEMENTS
Statements included in the Form 10-Q, which are not historical in nature, are
forward-looking statements made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
18
commonly identified by the use of such terms and phrases as "intends,"
"believes," "estimates," "expects," "projects," "anticipates," "foreseeable
future," "seeks," and words or phases of similar import. Such statements are
subject to certain risks, uncertainties or assumptions. Should one or more of
these risks or assumptions materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Such risks and uncertainties include, but are not limited to,
CBIZ's ability to adequately manage its growth; CBIZ's dependence on the
services of its CEO and other key employees; competitive pricing pressures;
general business and economic conditions; and changes in governmental regulation
and tax laws affecting its operations. A more detailed description of risks and
uncertainties may be found in CBIZ's Annual Report on Form 10-K. All
forward-looking statements in this Form 10-Q are expressly qualified by the
Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
QUANTITATIVE INFORMATION ABOUT MARKET RISK.
CBIZ's floating rate debt under its credit facility exposes the Company to
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 CBIZ
could borrow funds under its credit facility. If market interest rates were to
increase or decrease immediately and uniformly by 100 basis points from the
levels at September 30, 2002, interest expense would increase or decrease by
$0.3 million annually. CBIZ has entered into an interest rate swap to minimize
the potential impact of future increases in interest rates. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk Management," for a further discussion of this
financial instrument.
CBIZ does not engage in trading market risk sensitive instruments. Except for
the interest rate swap discussed above, CBIZ does not purchase instruments,
hedges, or "other than trading" instruments that are likely to expose CBIZ to
market risk, whether foreign currency exchange, commodity price or equity price
risk. CBIZ has not issued debt instruments, entered into forward or futures
contracts, or purchased options.
QUALITATIVE INFORMATION ABOUT MARKET RISK.
CBIZ'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 CBIZ could borrow funds under its
credit facility. See "Quantitative Information about Market Risk" for a further
discussion on the potential impact of a change in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer have evaluated the
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as of a date within 90 days before the filing date of this
quarterly report. Based on this evaluation they concluded that the disclosure
controls and procedures effectively ensure that information required to be
disclosed in our filings and submissions under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation of the internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.17 Credit Agreement dated September 26, 2002 among
Century Business Services, Inc., Bank of America,
N. A. as Agent, Issuing Bank, and Swing Line Bank,
and the Other Financial Institutions Party Hereto
99.1 Certification of Chief Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the
three months ended September 30, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURY BUSINESS SERVICES, INC.
-------------------------------
(Registrant)
Date: November 14, 2002 By: /s/ WARE H. GROVE
------------------ ------------------------------
Ware H. Grove
Chief Financial Officer
20
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Steven l. Gerard, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century Business
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ STEVEN L. GERARD
----------------- ---------------------------
Steven L. Gerard
Chief Executive Officer
21
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Ware H. Grove, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century Business
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ WARE H. GROVE
----------------- ---------------------------
Ware H. Grove
Chief Financial Officer
22