SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to
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Commission file number 0-25890
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CENTURY BUSINESS SERVICES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2769024
- ------------------------------------ ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
-----------------------
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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, 2001
--------------------- -------------------
Par value $.01 per share 95,513,623
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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, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 5
Notes to the Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
Item 3. Quantitative and Qualitative Information about Market Risk 15
PART II. OTHER INFORMATION :
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30,
2001 DECEMBER 31,
(unaudited) 2000
--------------- --------------
ASSETS
Cash and cash equivalents $ 6,350 $ 15,970
Restricted cash and funds held for clients 63,519 80,590
Accounts receivable, less allowance for doubtful
accounts of $15,946 and $22,156 135,896 142,682
Notes receivable - current 774 667
Income taxes recoverable 10,919 22,519
Deferred income taxes 3,780 9,895
Other current assets 9,718 13,864
--------- ---------
Total current assets 230,956 286,187
Goodwill, net of accumulated amortization of
$63,739 and $47,261 261,278 281,268
Property and equipment, net of accumulated
depreciation of $39,547 and $29,813 55,917 59,349
Notes receivable - non-current 3,454 3,564
Deferred income taxes - non-current 6,780 2,028
Other assets 13,036 17,098
--------- ---------
TOTAL ASSETS $ 571,421 $ 649,494
========= =========
LIABILITIES
Accounts payable $ 24,697 $ 35,220
Notes payable and capitalized leases - current 2,409 4,382
Client fund obligations 28,944 39,719
Accrued expenses 36,670 45,455
--------- ---------
Total current liabilities 92,720 124,776
Bank debt 68,000 117,500
Notes payable and capitalized leases - non-current 1,571 1,432
Accrued expenses 20,100 18,848
--------- ---------
TOTAL LIABILITIES 182,391 262,556
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 949 947
Additional paid-in capital 439,126 438,681
Accumulated deficit (49,750) (51,906)
Treasury stock (1,090) (754)
Accumulated other comprehensive loss (205) (30)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 389,030 386,938
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 571,421 $ 649,494
========= =========
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,
------------------------ ------------------------
2001 2000 2001 2000
----------- ---------- ---------- ----------
Revenue $117,931 $132,624 $412,969 $447,965
Operating expenses 113,647 117,129 349,673 368,172
-------- -------- -------- --------
Gross margin 4,284 15,495 63,296 79,793
Corporate general and administrative 5,216 4,512 15,074 18,099
Depreciation and amortization 10,469 11,201 30,299 32,431
-------- -------- -------- --------
Operating income (loss) (11,401) (218) 17,923 29,263
-------- -------- -------- --------
Other income (expense):
Interest expense (1,447) (3,102) (5,844) (9,294)
Gain (loss) on sale of operations, net 234 - (1,166) (566)
Other income, net 453 666 2,880 3,361
-------- -------- -------- --------
Total other expense, net (760) (2,436) (4,130) (6,499)
Income (loss) from continuing operations before
income tax expense (12,161) (2,654) 13,793 22,764
Income tax expense (benefit) (3,006) 1,029 11,637 15,147
-------- -------- -------- --------
Income (loss) from continuing operations (9,155) (3,683) 2,156 7,617
Income (loss) from operations of discontinued business,
net of tax - 546 - (1,214)
Gain (loss) on disposal of discontinued business, net of tax - 238 - (8,183)
-------- -------- -------- --------
Income (loss) before cumulative effect of a change in
accounting principle, net of tax (9,155) (2,899) 2,156 (1,780)
Cumulative effect of a change in accounting principle,
net of tax - - - (11,905)
-------- -------- -------- --------
Net income (loss) $ (9,155) $ (2,899) $ 2,156 $(13,685)
======== ======== ======== ========
Earnings (loss) per share:
Basic:
Continuing operations $ (0.10) $ (0.04) $ 0.02 $ 0.08
Discontinued operations - 0.01 - (0.09)
Cumulative effect of change in accounting principle - - - (0.13)
-------- -------- -------- --------
Net income (loss) $ (0.10) $ (0.03) $ 0.02 $ (0.14)
======== ======== ======== ========
Diluted:
Continuing operations $ (0.10) $ (0.04) $ 0.02 $ 0.08
Discontinued operations - 0.01 - (0.09)
Cumulative effect of change in accounting principle - - - (0.13)
-------- -------- -------- --------
Net income (loss) $ (0.10) $ (0.03) $ 0.02 $ (0.14)
======== ======== ======== ========
Basic weighted average shares outstanding 94,919 93,645 94,908 93,615
======== ======== ======== ========
Diluted weighted average shares outstanding 94,919 93,645 96,602 94,577
======== ======== ======== ========
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,
----------------------------
2001 2000
----------- -----------
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES $ 40,363 $ 16,571
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired and contingent
consideration on prior transactions (1,620) (5,090)
Additions to property and equipment, net (8,824) (18,317)
Proceeds from dispositions of businesses 11,979 711
Proceeds from (additions to) notes receivable, net 3 (731)
-------- --------
Net cash provided by (used in) investing activities 1,538 (23,427)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 26,900 87,500
Proceeds from notes payable and capitalized leases 296 3,349
Payment of bank debt (76,400) (86,500)
Payment of notes payable and capitalized leases (2,125) (9,326)
Proceeds from stock issuances, net 29 17
Purchase of treasury stock (336) -
Proceeds from exercise of stock options and warrants, net 115 107
-------- --------
Net cash used in financing activities (51,521) (4,853)
-------- --------
Net decrease in cash and cash equivalents (9,620) (11,709)
Cash and cash equivalents at beginning of period 15,970 24,740
-------- --------
Cash and cash equivalents at end of period $ 6,350 $ 13,031
======== ========
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, 2001
and December 31, 2000, the results of their operations for the three
and nine-month periods ended September 30, 2001 and 2000, and cash
flows for the nine-month periods ended September 30, 2001 and 2000. 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, 2000 condensed consolidated
balance sheet was derived from CBIZ's audited consolidated balance
sheet. 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, 2000.
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 2000
financial statements to conform to the 2001 presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term highly
liquid investments with a maturity of three months or less at the date
of purchase. The carrying amount approximates fair value because of the
short maturity of those instruments.
Restricted Cash and Funds Held for Clients
Restricted cash represents funds on deposit from clients related to its
payroll and payroll tax filing services, and insurance related
services. In addition, a portion of restricted cash pertains to fees
earned by CBIZ in relation to its capital and investment advisory
services, those funds are restricted in accordance with applicable NASD
regulations.
As part of its payroll and payroll tax filing services, CBIZ is engaged
in the preparation of payroll checks, federal, state, and local payroll
tax returns, and the collection and remittance of payroll obligations.
In relation to its payroll services, CBIZ collects payroll funds from
its client's account in advance of paying the client's employees.
Likewise, for its payroll tax filing services, CBIZ collects payroll
taxes from its clients in advance of paying the various taxing
authorities. Those funds that are collected before they are due are
invested in short-term investment grade instruments. The funds held for
clients and the related client fund obligations are included in the
condensed consolidated balance sheets as current assets and current
liabilities, respectively. The amount of collected but not yet remitted
funds for CBIZ's payroll and tax filing services varies significantly
during the year.
For its insurance business, funds on deposit from clients pertains to
the administering and settling of claims, and the pass through of
insurance premiums to the carrier. A related liability for these funds
is recorded in accrued expenses in the condensed consolidated balance
sheets.
Financial Instruments and Hedging
CBIZ uses interest rate swap agreements to manage interest costs and
the risk associated with changing interest rates. The interest
differential paid or received under the interest rate swap agreement is
recognized in interest expense. CBIZ accounts for 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 condensed consolidated
balance sheet. The change in fair value is recorded as other
comprehensive income for the portion of the hedge that is effective,
and the portion of the hedge that is ineffective is recorded as other
(income) expense in the consolidated statement of operations.
6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
2. ACQUISITIONS AND DIVESTITURES
During the second quarter of 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 is being amortized over
a 15-year period. As a result of the nature of the assets and
liabilities of the business acquired, there were no material
identifiable intangible assets or liabilities.
During the first quarter of 2001, CBIZ completed the sale of three
non-core business operations for an aggregate price of $2.4 million,
which resulted in a pretax loss of $0.1 million. CBIZ also recorded an
additional charge of $2.2 million related to the divestiture of
another business unit that was completed in the second quarter of
2001. During the second quarter of 2001, CBIZ completed the sale of
three business units (including the operation discussed above) for an
aggregate price of $9.4 million, which resulted in a pretax gain of
$0.9 million. In addition, CBIZ closed one non-core business for a
loss of less than $0.1 million. 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. The aforementioned gains and
losses have been included in gain (loss) on sale of operations in the
accompanying condensed consolidated statements of operations.
3. 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, 2000. There
have been no significant developments in such claims or suits during
the first nine months of 2001. 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.
4. EARNINGS PER SHARE
For the periods presented, 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, except per
share data). Included in potential dilutive common shares are
contingent shares, which represent shares issued and placed in escrow
that will not be released until certain performance goals have been
met.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
2001(a) 2000(a) 2001 2000
-------- -------- -------- --------
Denominator
Basic
Weighted average common
shares 94,919 93,645 94,908 93,615
------ ------ ------ ------
Diluted
Options 2,553 43 1,633 305
Contingent shares 61 657 61 657
------ ------ ------ ------
Total 97,533 94,345 96,602 94,577
====== ====== ====== ======
(a) The basic weighted average shares have been used in place of the
diluted weighted average shares for the three month periods ended
September 30, 2001 and 2000, respectively, as the net loss for the
periods would cause the incremental shares to be antidilutive.
7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
5. CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 2000, CBIZ adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognized in Financial Statements." SAB 101 summarizes certain of the
Commission's views in applying generally accepted accounting principles
to revenue recognition in financial statements. In light of the
guidance given by SAB 101 and the SEC's "Frequently Asked Questions and
Answers" bulletin released on October 12, 2000, CBIZ changed certain
revenue recognition policies effective January 1, 2000.
Due to this change, CBIZ recorded a cumulative adjustment in the first
quarter of 2000 of $11.9 million (net of tax benefit of $7.9 million).
The impact of adopting SAB 101 for the three and nine-month periods
ended September 30, 2000, resulted in a reduction in revenue of
approximately $6.8 million and $11.9 million, respectively, a reduction
in operating expense of approximately $3.0 million and $7.2 million,
respectively, and a reduction in income from continuing operations
before income taxes of approximately $3.8 million and $4.7 million,
respectively.
6. CONSOLIDATION AND INTEGRATION CHARGES
Consolidation and integration reserve balances as of December 31, 2000,
activity during the nine-month period ended September 30, 2001, and the
remaining reserve balances as of September 30, 2001, were as follows
(in thousands):
Lease Severance &
Consolidation Benefits
---------------- ---------------
Reserve balance at December 31, 2000 $ 2,843 449
Amounts adjusted to income (380) (159)
Payments (799) (215)
-------- -----
Reserve balance at September 30, 2001 $ 1,664 75
======== =====
During the fourth quarter of fiscal 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 at least
60 office locations, the elimination of more than 200 positions
(including Corporate), and the divestiture of four small, non-core
businesses. Pursuant to the plan, Century recorded a consolidation and
integration pre-tax charge of $27.4 million, which included $4.8
million for severance and $9.4 million for obligations under various
noncancellable leases that were committed to prior to plan approval,
for which no economic benefit to CBIZ would be subsequently realized.
As a result of executive management changes (including CBIZ's President
and Chief Operating Officer) and certain strategic changes in the first
quarter of fiscal 2000, CBIZ revisited the extent of its planned
integration and consolidation initiatives and extended the timing of
certain office consolidations beyond one year. CBIZ's Board of
Directors approved the revision to the plan on March 31, 2000.
Accordingly, CBIZ reduced approximately $4.4 million of accruals
originally provided for in the plan related to the aforementioned
noncancellable lease obligations, and reduced approximately $1.3
million of accruals related to the elimination of certain positions.
8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
6. CONSOLIDATION AND INTEGRATION CHARGES (con't)
For 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 will 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 have been completed.
In addition to the consolidation activity described above that relates
to the original accrual, CBIZ has incurred expenses related to
noncancellable lease obligations related to consolidations in other
markets, abandonment of leases, and severance obligations related to
these consolidations, as well as expense-reduction initiatives. For the
nine-month period ended September 30, 2001, charges incurred related
primarily to consolidation activity in the Chicago, Philadelphia,
Phoenix, and Southern California markets. Consolidation and integration
charges incurred for the nine-months ended September 30, 2001 and 2000,
were as follows (in thousands):
2001 2000
------------------------------ -------------------------------------------
Corporate Corporate Loss
Operating G&A Operating G&A On
Expense Expense Expense Expense Sale
---------------- ------------- ------------ -------------- -------------
Consolidation and integration
charges not in original plan:
Severance expense 226 93 1,042 3,075 -
Lease consolidation and
abandonment 989 - 365 - -
Other consolidation charges 596 - 315 763 -
Shared service and
consolidation - - - 377 -
Write-down of non-core
businesses - - 449 - 566
----- ---- ------ ------ ----
Subtotal 1,811 93 2,171 4,215 566
Consolidation and integration
charges in original plan:
Adjustment to lease accrual (380) - (5,901) - -
Adjustment to severance
accrual (52) (25) - (2,445) -
----- ---- ------ ------ ----
Total consolidation and
integration charges 1,379 68 (3,730) 1,770 566
===== ==== ====== ====== ====
9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
7. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," established
standards for reporting selected information about operating segments,
products and services, geographic areas and major customers.
CBIZ's business units were previously aggregated into four reportable
segments: business solutions; benefits and insurance; performance
consulting and technology solutions services. In November 2000, CBIZ
changed its structure from four divisions to three divisions: Business
Solutions, Benefits and Insurance, and National Practices, although the
financial reports were not fully functional until January 1, 2001. The
performance consulting and technology solutions divisions were merged
into the National Practices, and certain business units that formerly
reported under Business Solutions and Benefits and Insurance have been
moved to the National Practices division, as these units have a
national platform to provide services to customers. Segment information
for the three and nine-month periods ended September 30, 2000 have been
restated in accordance with the new segments.
Segment information for the three and nine-month periods ended
September 30, 2001 and 2000 is as follows (in thousands):
For the Three Months Ended September 30, 2001
----------------------------------------------------------------------------
Business Benefits & National Corporate Total
Solutions Insurance Practices and Other
---------- ------------ -------------- ----------- -------------
Revenue $ 50,661 $ 31,595 $ 35,675 $ - $ 117,931
Operating expenses 49,983 29,554 31,673 2,437 113,647
Corporate gen. and admin. - - - 5,216 5,216
Depreciation and amortization 1,146 1,458 840 7,025 10,469
Interest expense 16 35 18 1,378 1,447
Gain on sale of operations, net - - - (234) (234)
Other (income) expense, net (144) 84 (356) (37) (453)
--------- -------- -------- --------- ---------
Pre-tax income (loss) $ (340) $ 464 $ 3,500 $ (15,785) $ (12,161)
--------- -------- -------- --------- ---------
For the Three Months Ended September 30, 2000
----------------------------------------------------------------------------
Business Benefits & National Corporate Total
Solutions Insurance Practices and Other
---------- ------------ -------------- ----------- -------------
Revenue $ 52,905 $ 37,899 $ 41,820 $ - $ 132,624
Operating expenses 48,801 30,374 37,643 311 117,129
Corporate gen. and admin. - - - 4,512 4,512
Depreciation and amortization 1,121 829 872 8,379 11,201
Interest expense 42 33 28 2999 3,102
Other (income) expense, net (196) (61) (1,009) 600 (666)
--------- -------- -------- --------- ---------
Pre-tax income (loss) $ 3,137 $ 6,724 $ 4,286 $ (16,801) $ (2,654)
--------- -------- -------- --------- ---------
For the Nine Months Ended September 30, 2001
-------------------------------------------------------------------------------
Business Benefits & National Corporate Total
Solutions Insurance Practices and Other
---------- ------------ -------------- ----------- -------------
Revenue $ 190,001 $110,852 $112,116 $ - $ 412,969
Operating expenses 153,564 89,916 100,821 5,372 349,673
Corporate gen. and admin. - - - 15,074 15,074
Depreciation and amortization 3,347 3,586 2,505 20,861 30,299
Interest expense 61 129 60 5,594 5,844
Loss on sale of operations, net - - - 1,166 1,166
Other income, net (609) (727) (1,433) (111) (2,880)
--------- -------- -------- --------- ---------
Pre-tax income (loss) $ 33,638 $ 17,948 $ 10,163 $ (47,956) $ 13,793
--------- -------- -------- --------- ---------
For the Nine Months Ended September 30, 2000
-------------------------------------------------------------------------------
Business Benefits & National Corporate Total
Solutions Insurance Practices and Other
---------- ------------ -------------- ----------- -------------
Revenue $ 200,337 $121,702 $125,926 $ - $ 447,965
Operating expenses 154,312 94,907 113,921 5,032 368,172
Corporate gen. and admin. - - - 18,099 18,099
Depreciation and amortization 3,431 1,893 2,467 24,640 32,431
Interest expense 319 125 124 8,726 9,294
Loss on sale of operations, net - - - 566 566
Other income, net (514) (473) (2,299) (75) (3,361)
--------- -------- -------- --------- ---------
Pre-tax income (loss) $ 42,789 $ 25,250 $ 11,713 $ (56,988) $ 22,764
--------- -------- -------- --------- ---------
10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
8. DISCONTINUED OPERATIONS
In April 1999, CBIZ adopted a formal plan to divest of its risk-bearing
specialty insurance segment, which was no longer part of CBIZ's
strategic long-term growth objectives. The risk-bearing specialty
insurance segment, which included Century Surety Company, Evergreen
National Indemnity, and Continental Heritage Insurance Company, was
reported as a discontinued operation and its net assets and results of
operations were reported separately in the unaudited condensed
consolidated financial statements. Revenue from the discontinued
operations for the three and nine-month periods ended September 30,
2000 were $12.0 million and $34.0 million, respectively. The Company
completed the sale of the risk-bearing insurance segment in October of
2000 to Pro Finance Holding Corporation.
9. SUBSEQUENT EVENTS
Subsequent to September 30, 2001, CBIZ completed an amendment to its
existing credit facility with its lenders. CBIZ is currently in
compliance with all debt covenants under the amended credit facility.
The amendment provided CBIZ with waivers of default arising out of its
non-compliance with the interest coverage and leverage ratios for
period ended September 30, 2001. The amendment also provided for the
following changes to the credit facility: 1) EBITDA targets were reset
for the periods ended September 30, 2001 and periods ended through
2002; 2) the covenant that ties the level of borrowing to the level of
accounts receivable was revised so that the base for accounts
receivable and WIP were both set at 90 days; 3) the loan commitment was
reduced from $140 million to $100 million with subsequent planned
reductions to $80 million at June 30, 2002; 4) the applicable margin
pertaining to interest rates was increased by 25 basis points for each
level on the pricing grid, and 5) restricts the use of funds for the
repurchase of CBIZ stock.
On October 4, 2001 CBIZ signed an exclusive agreement with HarborView
Partners, a Stamford, Connecticut-based provider of internal audit and
business advisory services. Under the terms of the multi-faceted
agreement between the two companies, CBIZ will be the exclusive
provider of professionals to HarborView Partners for their internal
audit engagements in the United States. To support this initiative,
CBIZ will provide working capital of $2.5 million contingent upon the
growth of HarborView Partners. In addition, CBIZ has the right to
acquire up to 20% of the company.
On October 1, 2001, CBIZ completed the sale of a client list in the
Benefits and Insurance division for approximately $1.1 million in
cash, resulting in an estimated pretax gain of $0.4 million.
On November 1, 2001, CBIZ completed the sale of a business unit in the
National Practices division for approximately $0.6 million in cash and
notes, and will result in an estimated pretax loss of less than $0.1
million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Century Business Services, Inc. ("CBIZ") 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; government relations; commercial real
estate; wholesale insurance; healthcare consulting; medical practice management;
worksite marketing; and capital advisory services.
RESULTS OF OPERATIONS
Revenue
Total revenue decreased to $117.9 million for the three-month period
ended September 30, 2001, from $132.6 million for the comparable period in 2000,
a decrease of $14.7 million, or 11.1%. Total revenue decreased to $413.0 million
for the nine-month period ended September 30, 2001, from $448.0 million for the
comparable period in 2000, a decrease of $35.0 million, or 7.8%. The decrease
for the three and nine-month period was primarily attributable to (i)
divestitures completed subsequent to the second quarter of 2000, (ii) lower than
expected revenue particularly in the month of September resulting from
generally weak economic conditions; and (iii) soft demand for consulting
services and the decline in asset-based investment advisory fees, which were
negatively impacted by the sharp decline in values of the equity market. The
decrease in revenue attributable to divestitures was $8.9 million and $21.3
million for the three and nine-month periods ended September 30, 2001,
respectively. For business units with a full period of operations for the
three-month periods ended September 30, 2001 and 2000, revenue decreased $5.8
million, or 4.6%. For business units with a full period of operations for the
nine-month periods ended September 30, 2001 and 2000, revenue decreased $13.7
million, or 3.3%.
Expenses
Operating expenses decreased to $113.6 million for the three-month
period ended September 30, 2001, from $117.1 million for the comparable period
in 2000, a decrease of $3.5 million, or 3.0%. Operating expenses decreased to
$349.7 million for the nine-month period ended September 30, 2001, from $368.2
million for the comparable period in 2000, a decrease of $18.5 million, or 5.0%.
As a percentage of revenue, operating expenses for the three and nine-month
periods ended September 30, 2001 were 96.4% and 84.7%, compared to 88.3% and
82.2%, respectively for the comparable period. Excluding consolidation and
integration charges of $1.4 million for the nine-month period ended September
30, 2001, and consolidation and integration credits of $3.8 million for the
nine-month period ended September 30, 2000, operating expenses as a percentage
of revenue were 84.3% in 2001 compared to 83.0% of revenue in the comparable
period of 2000. The primary components of operating expenses are personnel costs
and facilities costs, both of which have decreased compared to the prior year.
Other operating costs such as commission expense and product costs have also
decreased due to decreased sales.
Corporate general and administrative expenses increased to $5.2 million
for the three-month period ended September 30, 2001, from $4.5 million for the
comparable period in 2000. Corporate general and administrative expenses
decreased to $15.1 million for the nine-month period ended September 30, 2001,
from $18.1 million for the comparable period in 2000. Excluding consolidation
and integration expenses of $1.8 million in 2000 (which consisted primarily of
costs related to severance payments and the new shared services center),
corporate general and administrative expenses decreased $1.2 million from $16.3
million for the nine-month period ended September 30, 2000, to $15.1 for the
comparable period in 2001. Such decrease was attributable to the lower personnel
costs and lower technology expenditures. Excluding consolidation and integration
expenses, corporate general and administrative expenses represented 3.6% of
total revenue for the nine-month period ended September 30, 2001, compared to
3.6% for the comparable period in 2000, respectively.
Depreciation and amortization expense decreased to $10.5 million for
the three-month period ended September 30, 2001, from $11.2 million for the
comparable period in 2000, a decrease of $0.7 million, or 6.5%. Depreciation and
amortization expense decreased to $30.3 million for the nine-month period ended
September 30, 2001, from $32.4 million for the comparable period in 2000, a
decrease of $2.1 million, or 6.6%. The decrease is primarily attributable to
lower goodwill amortization of $2.0 million and $5.3 million for the three and
nine-months periods, respectively, as a result of goodwill impairment recorded
in the fourth quarter of 2000 and a reduction in goodwill related to the
divestiture of several entities in the last twelve months. The decrease is
primarily offset by an increase in depreciation expense related to capital
expenditures. As a percentage of total revenue, depreciation and
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amortization expense was 8.9% and 7.3% for the three and nine-month periods
ended September 30, 2001, compared to 8.4% and 7.2% for the comparable periods
in 2000, respectively.
Interest expense decreased to $1.4 million for the three-month period
ended September 30, 2001, from $3.1 million for the comparable period in 2000, a
decrease of $1.7 million, or 53.4%. Interest expense decreased to $5.8 million
for the nine-month period ended September 30, 2001, from $9.3 million for the
comparable period in 2000, a decrease of $3.5 million, or 37.1%. The decrease is
the result of a lower average outstanding debt during the three and nine-month
periods ended September 30, 2001 as compared to the comparable prior periods, in
addition to a lower average interest rate. The weighted average interest rate on
bank debt for the three and nine-month periods ended September 30, 2001 was 6.9%
and 7.7%, respectively, compared to 8.7% and 8.2% for the comparable periods in
2000, respectively.
Net gain (loss) on sale of operations was $0.2 million and ($1.2
million) for the three and nine-month periods ended September 30, 2001, and was
related to the sale of three non-core operations in the first quarter of 2001,
the sale of three and the closure of one non-core business in the second quarter
of 2001 and the sale of a book of business in the third quarter of 2001. Loss on
sale of operations of ($0.6 million) for the nine-month periods ended September
30, 2000, was related to the sale of three smaller non-core businesses that were
announced in the fourth quarter of 1999, and a loss on a fourth business that
was written down to net realizable value based on estimated sales proceeds.
Other income, net decreased to $0.5 million for the three-month period
ended September 30, 2001, from $0.7 million for the comparable period in 2000, a
decrease of $0.2 million, or 32.0%. Other income, net decreased to $2.9 million
for the nine-month period ended September 30, 2001, from $3.4 million for the
comparable period in 2000, a decrease of $0.5 million, or 14.3%. Other income,
net is comprised primarily of interest and miscellaneous income. The decrease is
primarily related to the decrease in interest income derived from earnings at
CBIZ's payroll business due to lower interest rates in 2001, and the impairment
of a long-term investment of $0.4 million in the third quarter of 2001.
CBIZ recorded income tax expense (benefit) tax from continuing
operations of ($3.0 million) and $11.6 million for the three and nine-month
periods ended September 30, 2001, compared to $1.0 million and $15.1 million
for the comparable periods in 2000. The effective tax rate was 24.7% and 84.4%
for the three and nine-month periods ended September 30, 2001, compared to
(38.8%) and 66.5% for the comparable periods in 2000. Income taxes are provided
based on CBIZ's anticipated annual effective rate. The effective tax rate 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.
OTHER
Total assets decreased to $571.4 million at September 30, 2001, from
$649.5 million at December 31, 2000, which is primarily attributable to the
decrease in goodwill of $20.0 million, the decrease in cash and cash equivalents
of $9.6 million, the decrease in restricted cash of $17.1 million, the decrease
in accounts receivable, net of $6.8 million, and the decrease in income taxes
recoverable of $11.6 million. The decrease in assets was driven primarily by
CBIZ's goals to strengthen the balance sheet by better managing cash and
accounts receivable, and thereby paying down the line of credit. Other factors
that contributed to the decrease in total assets include 1) the divestment of
seven units (and closure of an additional unit) and their related assets,
including the reduction of any goodwill related to these divestitures; and 2)
the decrease in cash and cash equivalents, as operating cash and cash proceeds
from divestitures were primarily used to pay down debt. Total liabilities
decreased approximately $80.2 million, primarily due to the decrease in bank
debt of $49.5 million, in addition to the decrease in client fund obligations of
$10.8 million, and the general decrease in liabilities related to the
divestitures discussed above. Total stockholders' equity increased $2.1 million,
and is primarily due to net income for the first nine months of 2001 of $2.2
million.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended September 30, 2001, cash and cash
equivalents decreased $9.6 million to $6.4 million, from $16.0 million at
December 31, 2000, as cash used in financing activities of $51.5 million
exceeded cash provided by continuing operating activities of $40.4 million and
cash provided by investing activities of $1.5 million. In line with management's
objective of reducing debt during 2001, cash provided by operating and investing
activities were used to reduce bank debt by $49.5 million during the period,
from $117.5 million to $68 million.
Cash provided by investing activities of $1.5 million consisted of $12
million in proceeds from the disposition of seven business units, offset by $8.8
million used toward capital expenditures, and $1.6 million used toward the
acquisition of a technology services business and contingent consideration of
businesses acquired (earn-outs) during an earlier period. Largely, purchases of
property and equipment in the first nine months of 2001 were primarily
attributable to leasehold improvements and equipment in connection with the
consolidation of certain offices.
During the nine months ended September 30, 2001, cash used in financing
activities consisted primarily of a net reduction in bank debt from its credit
facility of $49.5 million and payment of $2.1 million used toward the reduction
of notes payable and capitalized leases. In addition, $0.4 million in cash was
used towards the purchase of 115,000 shares of CBIZ's Common Stock, in
accordance with CBIZ's Share Repurchase Program approved by the Board of
Directors on August 8, 2001.
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Subsequent to September 30, 2001, CBIZ completed an amendment to its existing
credit facility with its lenders. CBIZ is currently in compliance with all debt
covenants under the amended credit facility. The amendment provided CBIZ with
waivers of default arising out of its non-compliance with the interest coverage
and leverage ratios for period ended September 30, 2001. The amendment also
provided for the following changes to the credit facility: 1) EBITDA targets
were reset for the periods ended September 30, 2001 and periods ended through
2002; 2) the covenant that ties the level of borrowing to the level of accounts
receivable was revised so that the base for accounts receivable and WIP were
both set at 90 days; 3) the loan commitment was reduced from $140 million to
$100 million with subsequent planned reductions to $80 million at June 30, 2002;
4) the applicable margin pertaining to interest rates was increased by 25 basis
points for each level on the pricing grid, and 5) restricts the use of funds for
the repurchase of CBIZ stock.
CBIZ currently has $35 million of available funds under its credit facility.
Management believes that those available funds, along with cash generated from
operations, will be more than sufficient to meet its liquidity needs in the
foreseeable future.
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, 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 condensed 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 quarter and nine months ended September 30, 2001, the change in fair
value resulted in a loss of approximately $0.2 million, which is recorded as
other comprehensive income (loss).
NEW ACCOUNTING PRONOUNCEMENTS
In September 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets".
SFAS 141 provides for the elimination of the pooling-of-interests method of
accounting for business combinations completed on or after July 1, 2001. SFAS
142 will require that goodwill and other intangible assets with indefinite
useful lives no longer be amortized, but rather tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 is effective
for fiscal years beginning after December 15, 2001. CBIZ plans to adopt FASB
142 in its fiscal year beginning January 1, 2002. As of the date of adoption,
CBIZ expects to have unamortized goodwill in the amount of approximately $256
million, which will be subject to the transition provisions of SFAS 141 and
142. Amortization expense related to goodwill was approximately $28.8 million
and $16.3 million for the year ended December 31, 2000 and the nine months
ended September 30, 2001, respectively. Because of the extensive effort
required to comply with the new pronouncements, it is not practicable to
reasonably estimate the impact of adopting these statements on CBIZ's financial
statements at this time, including whether any transitional impairment losses
will be required to be recognized as a cumulative effect of a change in
accounting principle.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The provisions of
SFAS 143 will be effective for fiscal years
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beginning after June 15, 2002, however earlier application is permitted. CBIZ
does not believe SFAS 143 will have a significant impact our financial position
and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and portions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Discontinued Events and Extraordinary Items," and establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale. We are required to adopt SFAS 144
no later than January 1, 2002. We are currently evaluating the potential impact,
if any, the adoption of SFAS 144 will have 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 commonly identified by the use of such terms and phrases as "intends,"
"believes," "estimates," "expects," "projects," "anticipates," "foreseeable
future," "seeks," and words or phrases of similar import. Such statements are
subject to certain risks, uncertainties or assumptions. Should one or more of
these risks or 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 ability to meet its debt
obligations and debt covenants; 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 insurance business or its business services 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
CBIZ's floating rate debt 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,
2001, interest expense would increase or decrease by $0.4 million annually. CBIZ
has entered into an interest rate swap to minimize the potential impact of
future increases in interest rates. See "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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed
during the three months ended September 30, 2001.
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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: November 14, 2001 By: /s/ Ware H. Grove
------------------- ----------------------------
Ware H. Grove
Chief Financial Officer
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