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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 JUNE 30, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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 July 31, 2003
--------------------- ----------------
Par value $.01 per share 86,136,262
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002 5
Notes to the Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-22
Item 3. Quantitative and Qualitative Information about Market Risk 22
Item 4. Controls and Procedures 22-23
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,444 $ 6,351
Restricted cash 12,509 16,980
Accounts receivable, net 119,364 102,982
Notes receivable - current 3,207 2,029
Income taxes recoverable - 4,957
Deferred income taxes 3,908 3,567
Other current assets 8,302 7,098
Assets of businesses held for sale 10,054 9,566
--------- ---------
Current assets before funds held for clients 163,788 153,530
Funds held for clients 32,902 49,217
--------- ---------
Total current assets 196,690 202,747
Property and equipment, net 41,505 44,600
Notes receivable - non-current 4,396 7,585
Deferred income taxes - non-current 10,637 10,580
Goodwill and other intangible assets, net 164,633 163,706
Other assets 3,532 3,893
--------- ---------
Total assets $ 421,393 $ 433,111
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 27,718 $ 22,548
Income taxes payable 7,369 -
Other current liabilities 32,243 37,687
Liabilities of businesses held for sale 6,956 6,905
--------- ---------
Current liabilities before client fund obligations 74,286 67,140
Client fund obligations 32,902 49,217
--------- ---------
Total current liabilities 107,188 116,357
Bank debt - 17,500
Other non-current liabilities 5,723 4,936
--------- ---------
Total liabilities 112,911 138,793
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 954 951
Additional paid-in capital 440,344 439,684
Accumulated deficit (131,506) (144,754)
Treasury stock (1,308) (1,308)
Accumulated other comprehensive loss (2) (255)
--------- ---------
Total stockholders' equity 308,482 294,318
Commitments and contingencies
--------- ---------
Total liabilities and stockholders' equity $ 421,393 $ 433,111
========= =========
See the accompanying notes to the consolidated financial statements.
3
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue $ 126,080 $ 125,163 $ 272,375 $ 267,367
Operating expenses 112,489 112,128 230,550 227,522
--------- --------- --------- ---------
Gross margin 13,591 13,035 41,825 39,845
Corporate general and administrative 4,772 5,159 10,021 10,029
Depreciation and amortization 4,350 5,007 8,647 9,938
--------- --------- --------- ---------
Operating income 4,469 2,869 23,157 19,878
Other income (expense):
Interest expense (297) (653) (620) (1,471)
Gain on sale of operations, net 1,784 86 1,784 1,110
Other income (expense), net (155) 1,104 (693) 1,606
--------- --------- --------- ---------
Total other income, net 1,332 537 471 1,245
Income from continuing operations before
income tax expense 5,801 3,406 23,628 21,123
Income tax expense 2,468 1,452 10,043 9,085
--------- --------- --------- ---------
Income from continuing operations 3,333 1,954 13,585 12,038
Income (loss) from operations of discontinued businesses,
net of tax 97 74 (154) (366)
Loss on disposal of discontinued businesses, net of tax (183) (892) (183) (1,236)
--------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle 3,247 1,136 13,248 10,436
Cumulative effect of a change in accounting principle,
net of tax - - - (80,007)
--------- --------- --------- ---------
Net income (loss) $ 3,247 $ 1,136 $ 13,248 $ (69,571)
========= ========= ========= =========
Earnings (loss) per share:
Basic:
Continuing operations $ 0.04 $ 0.02 $ 0.14 $ 0.13
Discontinued operations (0.01) (0.01) - (0.02)
Cumulative effect of change in accounting principle - - - (0.84)
--------- --------- --------- ---------
Net income (loss) $ 0.03 $ 0.01 $ 0.14 $ (0.73)
========= ========= ========= =========
Diluted:
Continuing operations $ 0.03 $ 0.02 $ 0.14 $ 0.12
Discontinued operations - (0.01) - (0.02)
Cumulative effect of change in accounting principle - - - (0.82)
--------- --------- --------- ---------
Net income (loss) $ 0.03 $ 0.01 $ 0.14 $ (0.72)
========= ========= ========= =========
Basic weighted average shares outstanding 95,138 95,005 95,112 94,945
========= ========= ========= =========
Diluted weighted average shares outstanding 97,178 97,595 97,073 97,349
========= ========= ========= =========
See the accompanying notes to the consolidated financial statements.
4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 13,248 $(69,571)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss from discontinued operations 154 366
Loss on divestiture of discontinued operations 183 1,236
Gain on divested operations (1,784) (1,110)
Bad debt expense, net of recoveries 2,418 3,746
Impairment of notes receivable 2,014 -
Cumulative effect of change in accounting principle - 80,007
Depreciation and amortization 8,647 9,938
Deferred income taxes (398) (2,547)
Changes in assets and liabilities, net of acquisitions and
dispositions:
Restricted cash 4,339 5,169
Accounts receivable, net (19,249) (4,172)
Other assets (1,507) (4,110)
Accounts payable 5,472 2,026
Income taxes 12,488 7,086
Accrued expenses and other liabilities (5,916) (4,000)
-------- --------
Net cash provided by continuing operations 20,109 24,064
Net cash provided by discontinued operations 1,031 478
-------- --------
Net cash provided by operating activities 21,140 24,542
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired and
contingent consideration (1,553) -
Proceeds from divested operations 3,843 3,622
Additions to property and equipment, net (5,180) (6,341)
Net decrease in notes receivable 272 683
-------- --------
Net cash used in investing activities (2,618) (2,036)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 76,250 14,000
Proceeds from notes payable and capitalized leases 58 265
Payment of bank debt (93,750) (36,000)
Payment of notes payable and capitalized leases (1,128) (739)
Proceeds from exercise of stock options and warrants 141 532
-------- --------
Net cash used in financing activities (18,429) (21,942)
-------- --------
Net decrease in cash and cash equivalents 93 564
Cash and cash equivalents at beginning of year 6,351 4,340
-------- --------
Cash and cash equivalents at end of year $ 6,444 $ 4,904
======== ========
See the accompanying notes to the consolidated financial statements.
5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited 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) as of June 30,
2003 and December 31, 2002, and the results of their operations for the
three and six months ended June 30, 2003 and 2002, and cash flows for
the six months ended June 30, 2003 and 2002. The results of operations
for such interim periods are not necessarily indicative of the results
for the full year. The accompanying unaudited consolidated interim
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP)
for interim financial reporting and the instructions to Form 10-Q, and
accordingly do not include all disclosures required by GAAP. 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, 2002. Also, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a
discussion of critical accounting policies.
Use of Estimates
The preparation of financial statements in conformity with GAAP
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 2002 consolidated financial
statements to conform to the 2003 presentation.
New Accounting Pronouncements
Effective January 1, 2003, CBIZ adopted Statement of Financial
Accounting Standards (SFAS) 146, "Accounting for Costs Associated with
Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when costs
are incurred rather than at the date of a commitment to an exit or
disposal plan. The implementation of SFAS 146 did not have a material
impact on CBIZ's results of operations, financial position or cash
flows.
Effective January 1, 2003, CBIZ adopted SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosures," an amendment to
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
CBIZ has elected not to voluntarily change to the fair value based
method of accounting for stock options, but has adopted the disclosure
requirements. See Note 7 for the applicable disclosures.
Effective January 1, 2003, CBIZ adopted Financial Interpretation 45
(FIN 45), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others,"
which addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees. The implementation of the accounting pronouncement did not
have a material impact on CBIZ's results of operations, financial
position, or cash flows.
In January 2003, the FASB issued Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 addresses the
consolidation of variable interest entities (VIEs) that have the
characteristics of equity investments at risk not sufficient to permit
the entity to finance its activities without additional financial
support from other parties, or VIEs in which the equity investor lacks
essential characteristics of a controlling financial interest. The
consolidation requirements of FIN 46 apply immediately to VIE's created
after January 31, 2003. The consolidation requirements apply to
entities existing prior to January 31, 2003 in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31,
2003 regardless of when the VIE was established. CBIZ has adopted the
disclosure provisions and the consolidation requirements, where
applicable, on July 1, 2003.
In January 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative
6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Instruments and Hedging Activities." The Statement will improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly, and will result in more
consistent reporting of contracts as either derivatives or hybrid
instruments. This Statement is effective for contracts entered into or
modified after June 30, 2003. CBIZ does not believe this Statement will
have a material impact on is financial position, results of operations,
or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement affects the accounting for three types of
freestanding financial instruments that could previously be accounted
for as equity: mandatorily redeemable shares; put options and forward
purchase contracts; and obligations that can be settled with shares.
This Statement is effective for all financial instruments entered into
or modified after May 31, 2003 and otherwise is effective July 1, 2003.
CBIZ does not believe this Statement will have a material impact on is
financial position, results of operations, or cash flows.
2. ACCOUNTS RECEIVABLE
Accounts receivable balances were as follows (in thousands):
JUNE 30, 2003 DECEMBER 31, 2002
--------------- -------------------
Trade accounts receivable ...................................... $ 91,917 $ 82,694
Unbilled revenues .............................................. 37,520 29,123
-------- ----------
Total accounts receivable ...................................... 129,437 111,817
Less allowance for doubtful accounts ........................... (10,073) (8,835)
-------- ----------
Accounts receivable, net ....................................... $119,364 $ 102,982
======== ==========
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of intangible assets, net are as follows (in thousands):
JUNE 30, 2003 DECEMBER 31, 2002
--------------- -------------------
Goodwill ....................................................... $155,942 $ 157,035
Intangibles:
Client lists ................................................. 11,876 9,217
Other intangibles ............................................ 565 484
-------- ----------
Total intangibles ....................................... 12,441 9,701
Total goodwill and other intangibles assets .................... 168,383 166,736
Less accumulated amortization .................................. (3,750) (3,030)
-------- ----------
Total goodwill and other intangible assets, net ................ $164,633 $ 163,706
======== ==========
Client lists are amortized over a period not to exceed ten years. Other
intangibles, which consist primarily of non-compete agreements,
expirations, trademarks and website costs are amortized over periods
ranging from three to ten years.
4. BANK DEBT
Bank debt balances were as follows (in thousands, except percentages):
JUNE 30, 2003 DECEMBER 31, 2002
--------------- -------------------
Bank debt:
Revolving credit facilities, effective rates of 3.31% to 5.58% $ - $ 17,500
======== ==========
Weighted average rates ....................................... 5.14% 5.80%
======== ==========
7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
The bank agreement contains financial covenants that require CBIZ to
meet certain requirements with respect to (i) minimum tangible net
worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge
coverage ratio. Limitations are also placed on CBIZ's ability to
acquire as well as to divest operations. As of June 30, 2003, CBIZ was
in compliance with its covenants.
In the ordinary course of business, CBIZ provides letters of credit to
certain lessors in lieu of security deposits. Letters of credit under
the credit facility were $2.1 million and $1.9 million as of June 30,
2003 and December 31, 2002, respectively. Management does not expect
any material charges to result from these instruments because
performance is not expected to be required.
At June 30, 2003, based on the borrowing base calculation, CBIZ had
approximately $60.0 million of available funds under its credit
facility.
Effective June 6, 2003, CBIZ completed an amendment to its credit
facility with its lenders. The amendment was completed for purposes of
increasing restricted payments to allow CBIZ to repurchase up to $52.5
million of capital stock through December 31, 2003, in addition to the
current provision permitting the purchase of stock for up to 50% of
trailing twelve months net income. In conjunction with the amendment to
allow for increased repurchase of capital stock, the following changes
were made to the credit facility: (i) the minimum tangible net worth
requirement was revised to a minimum net worth test with a beginning
base of $260 million, and (ii) the borrowing base tied to levels of
accounts receivable and WIP was revised to permit an over-advance of $5
million to the total borrowing base for up to 10 consecutive business
days during each month through December 31, 2003.
5. 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, 2002. There
have been no significant developments in such claims or suits during
the first six months of 2003, other than an adjustment recorded to
certain legal reserves as the result of a favorable judgment received
in April of 2003. Reserve adjustments are recorded in other income
(expense), net. Although the ultimate disposition of such proceedings
is not presently determinable, management does not believe that the
ultimate resolution of these matters will have a material adverse
effect on the financial condition, results of operations or cash flows
of CBIZ.
6. CONSOLIDATION AND INTEGRATION CHARGES
The 1999 Plan -- During the fourth quarter of 1999, CBIZ's Board of
Directors approved a 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
approximately 60 locations, the elimination of more than 200 positions,
and the divestiture of four non-core businesses.
Other Plans -- Since adoption of the 1999 Plan, management has
continued to evaluate market areas in order to meet its strategy to
deliver services to clients conveniently, and to promote cross-serving
between various service groups. CBIZ has initiated consolidation
activities in several markets and has incurred expenses related to
noncancellable lease obligations, severance obligations, and
expense-reduction initiatives.
During the first six months of 2002, CBIZ initiated plans for the
consolidation of the Kansas City market which resulted in $1.7 million
of charges related to noncancellable lease obligations. During the
first six months of 2003, there were no significant charges related to
consolidation and integration activity. Management continually
evaluates and adjusts certain reserve estimates for noncancellable
lease obligations based on changes in market conditions and sublease
arrangements.
8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Consolidation and integration reserve balances as of December 31, 2002,
and activity during the six-month period ended June 30, 2003 was as
follows (in thousands):
LEASE CONSOLIDATIONS
-------------------------------
1999 PLAN OTHER PLANS
---------- ------------
Reserve balance at December 31, 2002 ........................... $ 64 $ 3,705
Reserve estimate adjustments to expense ...................... 20 154
Payments ..................................................... (78) (465)
-------- ----------
Reserve balance at June 30, 2003 ............................... $ 6 $ 3,394
======== ==========
Consolidation and integration charges incurred for the three and six
months ended June 30, 2003 and 2002, which are included in operating
expenses in the consolidated statements of operations, were as follows
(in thousands):
-------------------------------
THREE MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
-------- ----------
CONSOLIDATION AND INTEGRATION CHARGES NOT IN 1999 PLAN:
Severance expense .......................................... $ 40 $ (12)
Lease consolidation and abandonment ........................ 282 417
Other consolidation charges ................................ (19) 277
-------- ----------
Subtotal ............................................... 303 682
CONSOLIDATION AND INTEGRATION CHARGES FOR THE 1999 PLAN:
Adjustment to lease accrual .................................... 20 91
-------- ----------
Total consolidation and integration charges .................... $ 323 $ 773
======== ==========
-------------------------------
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
-------- ----------
CONSOLIDATION AND INTEGRATION CHARGES NOT IN 1999 PLAN:
Severance expense .......................................... $ 94 $ 29
Lease consolidation and abandonment ........................ 586 2,427
Other consolidation charges ................................ (26) 333
-------- ----------
Subtotal ............................................... 654 2,789
CONSOLIDATION AND INTEGRATION CHARGES FOR THE 1999 PLAN:
Adjustment to lease accrual .................................... 20 80
-------- ----------
Total consolidation and integration charges .................... $ 674 $ 2,869
======== ==========
7. STOCK-BASED COMPENSATION
CBIZ accounts for the stock-based compensation plans under the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock-based
employee compensation cost has been reflected in net income (loss), as
all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share as if CBIZ had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation
(in thousands, except per share data).
9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ----------------------------
2003 2002 2003 2002
---------- ------ ---------- ----------
Net income (loss) as reported ............. $ 3,247 $1,136 $ 13,248 $ (69,571)
Fair value of stock-based compensation, net
of tax .................................... 816 905 1,618 1,707
---------- ------ ---------- ----------
Pro forma net income (loss) ............... $ 2,431 $ 231 $ 11,630 $ (71,278)
========== ====== ========== ==========
Earnings (loss) per share:
Basic - as reported ................... $ 0.03 $ 0.01 $ 0.14 $ (0.73)
Basic - pro forma ..................... $ 0.02 $ - $ 0.12 $ (0.75)
Diluted - as reported ................. $ 0.03 $ 0.01 $ 0.14 $ (0.72)
Diluted - pro forma ................... $ 0.02 $ - $ 0.12 $ (0.73)
The above results may not be representative of the effects on net
income for future years.
8. EARNINGS PER SHARE
CBIZ 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 dilutive potential common
shares (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
NUMERATOR:
----------
Net income (loss) ............ $ 3,247 $ 1,136 $ 13,248 $(69,571)
DENOMINATOR:
------------
BASIC
Weighted average common
shares ............... 95,138 95,005 95,112 94,945
-------- -------- -------- --------
DILUTED
Options ............... 2,040 2,590 1,961 2,404
-------- -------- -------- --------
Total 97,178 97,595 97,073 97,349
======== ======== ======== ========
9. ACQUISITIONS
In January 2003, CBIZ completed the acquisition of a benefits and
insurance firm in Boca Raton, Florida, and in May 2003, CBIZ completed
the acquisition of an Accounting Tax & Advisory firm in Orange County,
California. The aggregate purchase price of these acquisitions was
approximately $4.3 million, comprised of $1.4 million in cash and
177,000 shares of restricted common stock (estimated stock value of
$0.5 million at acquisition) paid at closing, and up to an additional
$2.4 million payable in cash which is contingent on the unit meeting
certain future revenue targets. The excess of purchase price over fair
value of net assets acquired was allocated to the purchased client
list, which is being amortized over a
10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
ten-year period, and to certain non-compete agreements, which are being
amortized over two years. The operating results of these firms have
been included in the accompanying consolidated financial statements
since the dates of acquisition.
10. DIVESTITURES
During the first quarter of 2003, there were no transactions related to
the sale of a business, commitment to sell a business, or
classification of a unit as a discontinued operation. During the second
quarter of 2003, CBIZ sold two businesses; Health Administrative
Services (HAS) with offices in Dallas and Houston, Texas, and a small
401(k) recordkeeping business in Denver, Colorado. CBIZ completed the
sale of these two businesses for an aggregate price of $4.2 million in
cash. These divestitures resulted in a pretax gain of $1.8 million
During the first quarter of 2002, CBIZ sold, closed or committed to
sale, eight businesses. Of these eight operations, CBIZ completed the
sale or closing of five Accounting, Tax and Advisory (ATA) operations,
one Benefits and Insurance operation, and two National Practices
operations for an aggregate price of $5.7 million which included $3.6
million in notes receivable. These divestitures resulted in a pretax
gain of $1.1 million. During the second quarter of 2002, CBIZ completed
the sale of one non-core business operation for an aggregate price of
$1.2 million, which resulted in a pretax gain of $0.1 million.
The sale of these businesses was either initiated before CBIZ adopted
SFAS No. 144 "Accounting for the Impairment of or the Disposal of
Long-Lived Assets", or did not meet the criteria for treatment as a
discontinued operation and were reported under gain on divested
operations from continuing operations.
11. SEGMENT REPORTING
CBIZ business units are aggregated into three operating practice
groups: Accounting, Tax and Advisory (ATA), Benefits and Insurance, and
National Practices. CBIZ MMP, which is CBIZ's medical practice
management unit within the National Practices Group, exceeded the
quantitative threshold of aggregation (10% of total revenues) as
defined under SFAS No. 131, "Disclosures About Segments of Enterprise
and Related Information," in 2002, therefore requiring separate segment
disclosure. In addition, certain technology operations were transferred
from the ATA division to the National Practices division effective
January 1, 2003. Historical financial data was not available for all of
these operations; therefore, prior period data is included in the ATA
results and was not reclassified between ATA and National Practices.
In addition to the four reportable segments disclosed, corporate and
other is also reported separately. Corporate and other includes certain
operating expenses that are not allocated to any individual unit or
segment, such as insurance costs, audit fees, consolidation and
integration charges, and costs related to other company-wide
initiatives. Segment information for the three and six-month periods
ended June 30, 2003 and 2002 were as follows (in thousands):
11
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
-------------------------------------------------------------------------------------
Revenue ........................... $50,992 38,490 18,670 17,928 - $126,080
Operating expenses ................ 46,459 30,722 15,229 18,542 1,537 112,489
-------------------------------------------------------------------------------------
Gross margin .................... 4,533 7,768 3,441 (614) (1,537) 13,591
Corporate general & administrative - - - - 4,772 4,772
Depreciation and amortization ..... 1,252 730 646 290 1,432 4,350
-------------------------------------------------------------------------------------
Operating income (loss) ......... 3,281 7,038 2,795 (904) (7,741) 4,469
Other income (expense):
Interest expense ................ (14) (21) - - (262) (297)
Gain on sale of operation, net .. - - - - 1,784 1,784
Other income (expense), net ..... 44 33 (90) 179 (321) (155)
-------------------------------------------------------------------------------------
Total other income (expense) .. 30 12 (90) 179 1,201 1,332
-------------------------------------------------------------------------------------
Income (loss) from continuing .....
operations before income taxes $ 3,311 7,050 2,705 (725) (6,540) $ 5,801
=====================================================================================
THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
-------------------------------------------------------------------------------------
Revenue ........................... $52,065 38,110 16,634 18,354 - $125,163
Operating expenses ................ 46,702 31,050 13,233 19,209 1,934 112,128
-------------------------------------------------------------------------------------
Gross margin .................... 5,363 7,060 3,401 (855) (1,934) 13,035
Corporate general & administrative - - - - 5,159 5,159
Depreciation and amortization ..... 1,311 944 463 377 1,912 5,007
-------------------------------------------------------------------------------------
Operating income (loss) ......... 4,052 6,116 2,938 (1,232) (9,005) 2,869
Other income (expense):
Interest expense ................ (13) (20) (2) (8) (610) (653)
Gain on divested operations, net . - - - - 86 86
Other income (expense), net ..... 81 21 (10) 200 812 1,104
-------------------------------------------------------------------------------------
Total other income (expense) .. 68 1 (12) 192 288 537
-------------------------------------------------------------------------------------
Income (loss) from continuing .....
operations before income taxes $ 4,120 6,117 2,926 (1,040) (8,717) $ 3,406
=====================================================================================
12
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
-------------------------------------------------------------------------------------
Revenue ........................... $121,392 78,371 36,248 36,364 - $272,375
Operating expenses ................ 95,536 62,805 30,384 37,807 4,018 230,550
-------------------------------------------------------------------------------------
Gross margin .................... 25,856 15,566 5,864 (1,443) (4,018) 41,825
Corporate general & administrative - - - - 10,021 10,021
Depreciation and amortization ..... 2,508 1,484 1,247 613 2,795 8,647
-------------------------------------------------------------------------------------
Operating income (loss) ......... 23,348 14,082 4,617 (2,056) (16,834) 23,157
Other income (expense):
Interest expense ................ (27) (44) (1) (1) (547) (620)
Gain on sale of operations, net . - - - - 1,784 1,784
Other income (expense), net ..... 122 85 (91) 401 (1,210) (693)
-------------------------------------------------------------------------------------
Total other income (expense) .. 95 41 (92) 400 27 471
-------------------------------------------------------------------------------------
Income (loss) from continuing .....
operations before income taxes $ 23,443 14,123 4,525 (1,656) (16,807) $ 23,628
=====================================================================================
SIX MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
-------------------------------------------------------------------------------------
Revenue ........................... $124,410 73,969 31,745 37,243 - $267,367
Operating expenses ................ 97,241 61,196 26,184 37,642 5,259 227,522
-------------------------------------------------------------------------------------
Gross margin .................... 27,169 12,773 5,561 (399) (5,259) 39,845
Corporate general & administrative - - - - 10,029 10,029
Depreciation and amortization ..... 2,373 1,915 899 757 3,994 9,938
-------------------------------------------------------------------------------------
Operating income (loss) ......... 24,796 10,858 4,662 (1,156) (19,282) 19,878
Other income (expense):
Interest expense ................ (27) (42) (4) (30) (1,368) (1,471)
Gain on divested operations, net. - - - - 1,110 1,110
Other income (expense), net ....... 158 118 (7) 445 892 1,606
-------------------------------------------------------------------------------------
Total other income (expense) .. 131 76 (11) 415 634 1,245
-------------------------------------------------------------------------------------
Income (loss) from continuing .....
operations before income taxes $ 24,927 10,934 4,651 (741) (18,648) $21,123
=====================================================================================
12. DISCONTINUED OPERATIONS
During 2002, CBIZ adopted formal business plans to sell or close five
business operations that were no longer part of CBIZ's strategic
long-term growth objectives. These business operations are reported as
discontinued operations and the net assets and liabilities and results
of operations are reported separately in the consolidated financial
statements. One operation was closed during the first quarter of 2002
for a loss on disposal of $0.3 million and three additional operations
were subsequently closed during the remainder of the year 2002. One
operation still remains available for sale as of June 30, 2003.
13
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Revenue from the discontinued operations for the three and six-months
ended June 30, 2003 were $0.6 million and $2.7 million, respectively,
compared to $1.3 million and $5.5 million for the comparable periods in
2002.
The assets and liabilities of the business units classified as
discontinued operations consisted of the following (in thousands):
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Accounts receivable, net .................. $ 5,539 $ 5,499
Property and equipment, net ............... 488 508
Deferred tax asset, net ................... 3,194 3,554
Other assets .............................. 833 5
--------- ---------
Assets of discontinued operations ...... $ 10,054 $ 9,566
========= =========
Accounts payable .......................... $ 178 $ 425
Accrued expenses .......................... 6,778 6,480
--------- ---------
Liabilities of discontinued operations . $ 6,956 $ 6,905
========= =========
13. SUBSEQUENT EVENTS
In July of 2003, CBIZ completed the acquisition of a benefits and
insurance firm located in Salt Lake City, as well as a benefits and
insurance book of business in Hunt Valley, Maryland. The aggregate
purchase price of these acquisitions was approximately $2.0 million in
cash, of which $0.8 million was paid at closing, and $1.2 million of
which is contingent on the unit meeting certain future revenue targets.
In July of 2003, CBIZ completed its modified Dutch Auction tender offer
which resulted in the purchase of approximately 9.9 million shares of
common stock at a purchase price of $3.30 per share, or a total cost of
approximately $32.8 million. Subject to applicable law, CBIZ may in the
future purchase up to 5.1 million additional shares under its
previously announced share repurchase program authorizing the
repurchase of up to 15 million shares by December 31, 2003. The funds
necessary to complete this purchase were primarily drawn from CBIZ's
bank line of credit, leaving approximately $30.0 million available
under the credit facility.
On August 6, 2003, CBIZ announced the appointment of two new
independent directors, effective September 1, 2003. The appointments of
Todd J. Slotkin, 50, and Donald V. Wier, 62, bring the total number of
directors on CBIZ's Board to eight, seven of whom are outside
directors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of CBIZ's
financial position and results of operations for the three and six months ended
June 30, 2003 and 2002.
OPERATING PRACTICE GROUPS
CBIZ currently delivers products and services through three practice groups. A
brief description of these groups' operating results and factors affecting
their businesses is provided below.
Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory (ATA)
group contributed approximately $51.0 million and $52.1 million of revenue, or
approximately 40.4% and 41.6% of CBIZ's total revenue for the quarters ended
June 30, 2003 and 2002, respectively. The decrease in revenue attributable to
divestitures completed during or subsequent to the first quarter 2002 was $1.9
million, offset by an increase in revenues of $0.3 million due to acquisitions.
For ATA businesses with a full period of operations for the three months ended
June 30, 2003 and 2002, revenue increased $0.5 million, or 1.1%. The ATA group
reported gross margins of 8.9% and 10.3% for the three months ended June 30,
2003 and 2002.
Benefits and Insurance Services. The Benefits and Insurance group contributed
approximately $38.5 million and $38.1 million of revenue, or approximately
30.5% and 30.4% of CBIZ's total revenue for the quarter ended June 30, 2003 and
2002, respectively. Revenue growth of $2.0 million related to acquisitions
completed subsequent to the first quarter of 2002, offset by revenue decline
from divestitures of $0.9 million. For Benefits and Insurance businesses with a
full period of operations for the three-months ended June 30, 2003 and 2002,
same-unit revenue decreased $0.7 million, or 2.0%. Same unit revenue decline
was attributable to (i) the timing of commission bonus payments planned for the
second quarter that were received during the first quarter; and (ii) decrease
in revenue from worksite marketing which is expected to be recognized during
the second half of the year. Gross margin for the Benefits and Insurance group
for the three months ended June 30, 2003 was 20.2% as compared to 18.5% for the
three-months ended June 30, 2002.
National Practices Services- Medical Management Practice. CBIZ Medical
Management Professionals (CBIZ MMP), CBIZ's medical practice management unit in
the National Practices operating group, contributed approximately $18.7 million
and $16.6 million, or 14.8% and 13.3%, of CBIZ's total revenue for the quarter
ended June 30, 2003 and 2002, respectively. CBIZ MMP's revenue growth of $2.0
million, or 12.2%, is primarily attributable to the addition of new clients and
the expansion into new markets, such as entrance into the western region of the
United States during the later part of 2002. The gross margin for the three
months ended June 30, 2003 was 18.4% as compared to 20.4% for the three months
ended June 30, 2002.
National Practices Services- Other. The other units within the National
Practices group, excluding CBIZ MMP, contributed approximately $17.9 million
and $18.5 million of revenue, or approximately 14.2% and 14.8% of CBIZ's total
revenue for the quarter ended June 30, 2003 and 2002, respectively. The
decrease in revenue was primarily experienced in CBIZ's mergers and
acquisitions and valuation businesses.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Revenue
Total revenue for the three months ended June 30, 2003 was $126.1 million as
compared to $125.2 million for the three months ended June 30, 2002,
representing an increase of $0.9 million, or 0.7%. The increase in revenue
attributable to acquisitions completed subsequent to March 31, 2002 was $2.3
million, and was offset by a decrease in revenue of $1.2 million due to
divestitures completed subsequent to March 31, 2002. For business units with a
full period of operations for the three months ended June 30, 2003 and 2002,
revenue decreased $0.2 million or 0.2%. A more comprehensive analysis of revenue
by each operating practice group is discussed above.
15
Expenses
Operating expenses increased to $112.5 million for the three-month period ended
June 30, 2003, from $112.1 million for the comparable period in 2002, an
increase of $0.4 million, or 0.3%. As a percentage of revenue, operating
expenses for the three-month period ended June 30, 2003 were 89.2%, compared to
89.6% for the comparable period in 2002. The primary components of operating
expenses are personnel costs and occupancy expense. Operating expenses included
consolidation, integration and severance charges for the three months ended June
30, 2003 and 2002 of $0.6 million and $1.2 million, respectively. Excluding
consolidation and integration charges, operating expenses were $111.9 million or
88.8% as a percentage of revenue, for the three-month period ended June 30,
2003, compared to $111.0 million, or 88.6% as a percentage of revenue, for the
comparable period in 2002. CBIZ believes this information may provide additional
meaningful information in evaluating the company's performance. There were no
significant changes in the components of operating expenses between the second
quarters of 2002 and 2003.
Corporate general and administrative expenses decreased to $4.8 million for the
three-month period ended June 30, 2003, from $5.2 million for the comparable
period in 2002. Corporate general and administrative expenses represented 3.8%
of total revenues for the three-month period ended June 30, 2003, down from 4.1%
for the comparable period in 2002. The decrease in corporate general and
administrative costs was primarily due to a decrease in legal costs, as the
level of legal expenses to pursue cases concerning non-competition violations by
former employees and other cases in which CBIZ is involved, was higher than
usual in 2002.
Depreciation and amortization expense decreased to $4.4 million for the
three-month period ended June 30, 2003, from $5.0 million for the comparable
period in 2002, a decrease of $0.6 million, or 13.1%. The decrease is
attributable to asset retirements, fully depreciated assets, and the shift from
purchasing computer-related items to leasing such items. These operating lease
costs are recorded as operating expenses, rather than capitalized and recorded
as depreciation. As a percentage of total revenues, depreciation and
amortization expense was 3.5% for the three-month period ended June 30, 2003,
compared to 4.0% for the comparable period in 2002.
Interest expense decreased to $0.3 million for the three-month period ended June
30, 2003, from $0.7 million for the comparable period in 2002, a decrease of
$0.4 million, or 54.5%. The decrease is the result of a lower average
outstanding debt of $10.7 million during the second quarter of 2003, compared to
$47.1 million during the second quarter of 2002, and average interest rates were
approximately 5.2% during the second quarters of 2003, and 2002.
Gain on divested operations, net was $1.7 million for the three months ended
June 30, 2003, and was related to the sale of two businesses operations, Health
Administrative Services (HAS) and a small 401(k) recordkeeping business. Gain on
divested operations, net was $0.1 million for the three months ended June 30,
2002, and was related to the sale of one business operation. See Note 10 to
CBIZ's consolidated financial statements included herewith.
CBIZ reported other expense of $0.2 million for the three-month period ended
June 30, 2003, compared to other income of $1.1 million for the comparable
period in 2002, a decrease of $1.3 million. Other income (expense), net is
comprised primarily of interest income earned on funds held for clients at
CBIZ's payroll business, gain and losses on sale of assets, charges for legal
reserves and settlements and miscellaneous income such as contingent royalties
from previous divestitures. The change is primarily related to a $0.4 million
impairment charge to notes receivable and $0.4 million of other income relating
to contingent royalties received in 2002 that did not reoccur in 2003.
CBIZ recorded income taxes from continuing operations of $2.5 million and $1.5
million for the three-month periods ended June 30, 2003 and 2002, respectively.
The effective tax rate decreased to 42.5% for the three-month period ended June
30, 2003, from 42.6% for the comparable period in 2002. The effective tax rate
for the three-months ended June 30, 2003 and 2002 are generally in line with the
statutory federal and state tax rates.
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Revenue
Total revenue for the six months ended June 30, 2003 was $272.4 million as
compared to $267.4 million for the six months ended June 30, 2002, representing
an increase of $5.0 million, or 1.9%. The increase in revenue attributable to
acquisitions completed subsequent to March 31, 2002 was $4.5 million, and was
offset by a decrease in revenue of $2.0 million due to divestitures completed
subsequent to March 31, 2002. For business
16
units with a full period of operations for the six months ended June 30, 2003
and 2002, revenue increased $2.5 million or 1.0%.
Expenses
Operating expenses increased to $230.6 million for the six-month period ended
June 30, 2003, from $227.5 million for the comparable period in 2002, an
increase of $3.1 million, or 1.3%. As a percentage of revenue, operating
expenses for the six-month period ended June 30, 2003 were 84.6%, compared to
85.1% for the comparable period in 2002. The primary components of operating
expenses are personnel costs and occupancy expense. Operating expenses were
impacted by consolidation and integration charges of $1.1 million and $3.3
million for the six months ended June 30 2003 and 2002, respectively. Excluding
consolidation and integration charges, operating expenses were $229.5 million,
or 84.2% as a percentage of revenue, for the six-month period ended June 30,
2003, compared to $224.2 million, or 83.9% as a percentage of revenue, for the
comparable period in 2002. CBIZ believes that this information may provide
additional meaningful information in evaluating the Company's performance.
Operating expenses increased primarily due to increased compensation expense of
$7.1 million related to (i) additional hires to CBIZ's medical practice
management unit to support its growth, (ii) higher commission expense in the
Benefits and Insurance practice group related to the increased revenue and,
(iii) the addition of several former Arthur Andersen, LLP professionals to the
ATA practice group offset in part by other staff reductions in the group. The
increase was also offset by a decrease in bad debt expense of $1.5 million.
Corporate general and administrative expenses were consistent at $10.0 million
for the six-month periods ended June 30, 2003, and 2002. Corporate general and
administrative expenses represented 3.7% of total revenues for the six-month
period ended June 30, 2003, down from 3.8% for the comparable period in 2002.
Changes in corporate general and administrative costs were primarily driven by
an increase in severance costs of approximately $0.7 million incurred related to
reductions in corporate staff during the first quarter of 2003, offset by a
decrease of $0.8 million in certain legal expenses, as the level of legal
expenses to pursue non-competition violations by former employees was higher
than usual in 2002.
Depreciation and amortization expense decreased to $8.6 million for the
six-month period ended June 30, 2003, from $9.9 million for the comparable
period in 2002, a decrease of $1.3 million, or 13.0%. The decrease is
attributable to asset retirements, fully depreciated assets, and the shift from
purchasing computer-related items to leasing such items. These operating lease
costs are recorded as operating expenses, rather than capitalized and recorded
as depreciation. As a percentage of total revenues, depreciation and
amortization expense was 3.2% for the six-month period ended June 30, 2003,
compared to 3.7% for the comparable period in 2002.
Interest expense decreased to $0.6 million for the six-month period ended June
30, 2003, from $1.5 million for the comparable period in 2002, a decrease of
$0.9 million, or 57.9%. The decrease is the result of a lower average
outstanding debt of $15.0 million during the first six months of 2003, compared
to $50.5 million during the comparable period in 2002, and a lower average
interest rate of 5.1% during the first six months of 2003, compared to 5.5%
during the comparable period in 2002.
Gain on divested operations, net was $1.8 million for the six-month period ended
June 30, 2003, and was related to the sale or closing of two business
operations. Gain on divested operations, net was $1.1 million for the six-month
period ended June 30, 2002, and was related to the sale or closing of seven
businesses operations. See Note 10 to CBIZ's consolidated financial statements
included herewith.
CBIZ reported other expense of $0.7 million for the three-month period ended
June 30, 2003, compared to other income of $1.6 million for the comparable
period in 2002, a decrease of $2.3 million. Other income (expense), net is
comprised primarily of interest income earned on funds held for clients at
CBIZ's payroll business, gains and losses on sale of assets, charges for legal
reserves and settlements, and miscellaneous income such as contingent royalties
from previous divestitures. The change is primarily related to $2.0 million of
impairment charges to notes receivable and $0.4 million of other income relating
to contingent royalties received in 2002 that did not reoccur in 2003.
CBIZ recorded income taxes from continuing operations of $10.0 million for the
six months ended June 30, 2003, compared to $9.1 million recorded for the six
months ended June 30, 2002. The effective tax rate decreased to 42.5% for the
six-month period ended June 30, 2003, from 43.1% for the comparable period in
2002. The effective tax rate for the six-months ended June 30, 2003 and 2002 are
generally in line with the statutory federal and state tax rates.
17
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
During 2002, CBIZ adopted formal plans to divest five non-core operations which
were no longer part of CBIZ's strategic long-term growth objectives. These
operations were classified as discontinued operations in accordance with the
adoption of Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and the
assets, liabilities, and results of operations are reported separately in the
consolidated financial statements. One of these operations was closed during the
first quarter of 2002 and an additional three units were subsequently sold or
closed as of December 31, 2002. One operation still remains available for sale
as of June 30, 2003, and the sale is expected to be completed by year end. Based
on the estimated cost of closure, CBIZ recorded a loss on disposal from
discontinued operations, net of tax, of $0.2 million for the three and six
months ended June 30, 2003. Revenue associated with these five discontinued
operations for the three and six months ended June 30, 2003 was $0.6 million and
$1.1 million, respectively, compared to $2.0 million and $5.5 million for the
comparable periods in 2002, respectively. The income from operations, net of
tax, associated with these divestitures three months ended June 30, 2003 and
2002 was $0.1 million and $0.1 million, respectively, compared to a loss from
operations, net of tax, of $0.2 million and $0.4 million for the six months
ended June 30, 2003 and 2002, respectively.
RESULTS OF OPERATIONS -- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, CBIZ adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually at the reporting unit level. SFAS 142 also requires
intangible assets with finite useful lives to be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." CBIZ
finalized the required transitional tests of goodwill during 2002, and recorded
an impairment charge of $88.6 million on a pre-tax basis. This non-cash charge
is reflected as a cumulative effect of a change in accounting principle, net of
tax benefit, of $80.0 million.
FINANCIAL CONDITION
Cash provided by operating activities and funds available from CBIZ's credit
facility provide the resources to support current operations, projected growth,
acquisitions and capital expenditures. Restricted cash at June 30, 2003 was
$12.5 million, a decrease of $4.5 million from December 31, 2002. Restricted
cash represents those funds held in connection with CBIZ's NASD regulated
operations and funds held in connection with the pass through of insurance
premiums to the carrier. Funds held for clients were $32.9 million at June 30,
2003, a decrease of $16.3 million from December 31, 2002. Restricted cash and
funds held for clients fluctuate during the year based on the timing of cash
receipts and related payments. Accounts receivable, net were $119.4 million at
June 30, 2003 versus $103.0 million at December 31, 2002, an increase of $16.4
million. The increase in receivables is primarily attributed to the seasonal
increase in revenues, namely tax services generated by the ATA operating
practice group. Notes receivable at June 30, 2003 decreased $2.0 million from
December 31, 2002, primarily related to an impairment charge.
Current liabilities before client fund obligations increased $7.1 million from
December 31, 2002 primarily related to an increase in income taxes payable.
Client fund obligations were $32.9 million, a decrease of $16.3 million from
December 31, 2002. Client fund obligations fluctuate during the year based on
the timing of cash receipts and related payments. CBIZ's bank debt balance was
zero at June 30, 2003, a $17.5 million reduction from December 31, 2002. See
Note 4 to CBIZ's consolidated financial statements included herewith for
additional information regarding bank debt.
LIQUIDITY AND CAPITAL RESOURCES
CBIZ's bank line of credit is a $73.0 million revolving credit facility with
Bank of America as the agent bank. The credit facility carries an option to
increase the total commitment to $80 million and allows for the allocation of
funds for strategic initiatives, including acquisitions and the repurchase of
CBIZ common 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. CBIZ is currently in
compliance with all covenants under its credit facility.
At June 30, 2003, CBIZ had completely paid down its credit facility, and had
approximately $60.0 million of available funds under the facility based on the
borrowing base calculation. Management believes that those
18
available funds, along with cash generated from operations, will be sufficient
to meet its liquidity needs in the foreseeable future. See Notes 4 and 13 to
CBIZ's consolidated financial statements included herewith for additional
information regarding the credit facility.
SOURCES AND USES OF CASH
Net cash provided by operating activities was $21.1 million and $24.5 million
for the six-months ended June 30, 2003 and 2002, respectively, and was the
primary source of funds used to reduce CBIZ's bank debt. 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.
Net cash used in investing activities during the six-months ended June 30, 2003
of $2.6 million primarily consisted of $5.2 million used for capital
expenditures and $1.6 million used toward the acquisitions of two benefits and
insurance firms, partially offset by the proceeds from the divestiture of two
businesses of $3.8 million. Capital expenditures consisted of leasehold
improvements and equipment in connection with the consolidation of certain
offices, IT capital to support the growth of the medical practice management
unit and equipment purchases in relation to normal replacement. During the
six-months ended June 30, 2003, the majority of the capital expenditures were
related to the build-out of the new Kansas City facility, which was completed in
June.
Net cash used in investing activities during the six-months ended June 30, 2002
of $2.0 million consisted of $6.3 million used for capital expenditures, offset
by the proceeds from the divestiture of seven business units of $3.6 million and
the collections of notes receivable of $0.7 million.
Net cash used in financing activities was $18.4 million in 2003 compared to
$21.9 million in 2002. Cash was primarily used to reduce bank debt by $17.5
million in 2003, compared to a reduction in bank debt of $22.0 million for the
comparable period in 2002.
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. Based on the company's continued strong cash flow and its
ability to completely pay down its credit facility, the remaining notional
amount of $10 million under the swap was unwound during the quarter ended June
30, 2003. As a result $0.2 million previously recorded as accumulated other
comprehensive loss in stockholders' equity was charged to interest expense
during the quarter ended June 30, 2003.
CRITICAL ACCOUNTING POLICIES
The policies discussed below are considered by management to be critical to the
understanding of CBIZ's consolidated financial statements because their
application places significant demand on management's judgment, and financial
reporting results rely on estimation about the effects of matters that are
inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these policies, management
cautions that estimates may require adjustment if future events develop
differently than expected.
REVENUE RECOGNITION AND VALUATION OF UNBILLED REVENUES
Revenue is recognized only when all of the following are present: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) our fee to the client is fixed or determinable; and (iv)
collectibility is reasonably assured, which is in accordance with generally
accepted accounting principles and SEC Staff Accounting Bulletin No. 101. 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:
ACCOUNTING, TAX AND ADVISORY SERVICES - 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
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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. A
description of the revenue recognition, based on insurance products and billing
arrangements, is described below:
- Commissions relating to brokerage and agency activities whereby CBIZ
has primary responsibility for the collection of premiums from
insured's (agency or indirect billing) are generally recognized as of
the earlier of the effective date of the insurance policy or the date
billed to the customer.
- Commissions to be received directly from insurance companies (direct
billing) are generally recognized when the amounts are determined.
- Life insurance commissions are generally recognized when the amounts
are determined.
- Commission revenue is reported net of sub-broker commissions.
- Contingent commissions are recognized at the earlier of notification
or cash collection.
- Fee income is recognized in the period earned, and may be based on
actual hours incurred on an hourly fee basis, fixed fee arrangements
or asset-based fees.
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 pro rata 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 is recognized upon delivery and acceptance of the product.
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 pro rata 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., the assessor in the case
of a property tax engagement) acknowledging that the contingency has
been completed).
- Medical Practice Management - Revenue is recognized when payments are
received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
The preparation of 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
collectibility of our accounts receivable, including 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.
VALUATION OF GOODWILL
Effective January 1, 2002, CBIZ adopted the provisions of SFAS 142 and
accordingly ceased amortization of our remaining goodwill balance. During 2002,
CBIZ completed the process of evaluating our goodwill for impairment
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using the new fair market 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 ($80.0 million net of tax), which was
recorded as a cumulative effect of a change in accounting principle.
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 unaudited consolidated balance sheets. These investments are
inherently risky as the market for the technologies or products these companies
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. Although
the market value of these investments is not readily determinable, management
believes their current fair values approximate their carrying values as of June
30, 2003. 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. Contingent liabilities are often resolved over
long time periods. Estimating probable losses requires analysis that often
depends on judgment regarding potential actions by third parties.
ESTIMATES OF INCENTIVE COMPENSATION COSTS AND EFFECTIVE INCOME TAX RATES
Incentive compensation costs and income tax expense are two significant expense
categories that are highly dependent upon management estimates and judgments,
particularly at each interim reporting date. In arriving at the amount of
expense to recognize, management believes it makes reasonable estimates and
judgments using all significant information available. Incentive compensation
costs are accrued on a monthly basis; however, the ultimate determination is
made after our year-end results are finalized; thus, estimates are subject to
change. Circumstances that could cause our estimates of effective income tax
rates to change include the impact of information that subsequently becomes
available as we prepared our corporate income tax returns; the level of actual
full-year pre-tax income; revisions to tax positions taken as a result of
further analysis and consultation; and changes mandated as a result of audits by
taxing authorities.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above are nevertheless important to
understanding 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, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation 46 (FIN 46), "Consolidation of
Variable Interest Entities." FIN 46 addresses the consolidation of variable
interest entities (VIEs) that have the characteristics of equity investments at
risk not sufficient to permit the entity to finance its activities without
additional financial support from other parties, or VIEs in which the equity
investor lacks essential characteristics of a controlling financial interest.
The consolidation requirements of FIN 46 apply immediately to VIE's created
after January 31, 2003. The consolidation requirements apply to entities
existing prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply to
all financial statements issued after January 31, 2003 regardless of when the
VIE was established. CBIZ has adopted the disclosure provisions and the
consolidation requirements, where applicable, on July 1, 2003. CBIZ has
evaluated the impact of FIN 46 and does not believe that the consolidation
provisions of FIN 46 will have a material impact on the consolidated financial
statements.
In January 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement will improve
financial reporting by requiring that contracts with comparable
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characteristics be accounted for similarly, and will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. This
Statement is effective for contracts entered into or modified after June 30,
2003. CBIZ does not believe this Statement will have a material impact on is
financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
affects the accounting for three types of freestanding financial instruments
that could previously be accounted for as equity: mandatorily redeemable shares;
put options and forward purchase contracts; and obligations that can be settled
with shares. This Statement is effective for all financial instruments entered
into or modified after May 31, 2003 and otherwise is effective July 1, 2003.
CBIZ does not believe this Statement will have a material impact on is financial
position, results of operations, or cash flows.
FORWARD-LOOKING STATEMENTS
This 10-Q Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this 10-Q Report, including without limitation, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding CBIZ'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," "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 the 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. Consequently, no
forward-looking statement can be guaranteed. A more detailed description of
risks and uncertainties may be found in CBIZ's Annual Report on Form 10-K. CBIZ
undertakes no obligation to publicly update forward-looking statements, whether
as a result of new information, future events or otherwise. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
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. CBIZ had entered into an interest rate swap during 2001 to
minimize the potential impact of future increases in interest rates. This
interest rate swap was terminated during the second quarter of 2003, in concert
with the reduction in debt. See Item 2, "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 the end of the period covered by 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
22
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no significant changes in our internal controls over financial
reporting that have materially affected, or is reasonably likely to affect the
internal control over financial reporting, during the quarter covered by this
report
PART II - OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At CBIZ's Annual Meeting of Shareholders held on May 16, 2003, the following
matters were submitted to a vote of stockholders:
1) The election of the following individuals to the Board of Directors to
serve until the 2006 Annual Meeting of Shareholders.
Authority Granted Authority Withheld
----------------- ------------------
Gary W. DeGroote 66,326,202 1,425,448
Harve A. Ferrill 65,442,135 2,309,515
2) The approval of the appointment of KPMG LLP as independent accountants for
fiscal year 2003.
Shares For Shares Against Abstained
---------- -------------- ---------
66,160,827 1,558,175 32,648
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the three
months ended June 30, 2003:
On April 29, 2003, CBIZ filed a current report on Form 8-K to provide
investors with its first quarter earnings, as released to the public
and discussed on a conference call on April 29, 2003.
On June 10, 2003, CBIZ filed a current report on Form 8-K to provide
investors with information concerning CBIZ and its operations in a
series of presentations that began June 11, 2003.
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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: August 14, 2003 By: /s/ WARE H. GROVE
------------------- --------------------------
Ware H. Grove
Chief Financial Officer
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