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 March 31, 2002
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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
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
6480 Rockside Woods Boulevard South, Suite 330, Cleveland, Ohio 44131
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(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 April 30, 2002
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Par value $.01 per share 95,536,097
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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 -
March 31, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 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 16
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 16
Signature 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
March 31, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
Cash and cash equivalents $ 514 $ 4,330
Restricted cash and funds held for clients 50,305 50,847
Accounts receivable, less allowance for doubtful
accounts of $15,088 and $13,315 132,564 117,480
Notes receivable - current 2,257 2,260
Income taxes recoverable -- 2,798
Deferred income taxes 7,156 6,213
Other current assets 14,023 11,412
Assets of discontinued operations 267 748
--------- ---------
Total current assets 207,086 196,088
Goodwill, net of accumulated amortization of
$71,074 and $73,145 245,281 247,462
Property and equipment, net of accumulated
depreciation of $42,231 and $39,444 52,324 54,187
Notes receivable - non-current 7,984 5,000
Deferred income taxes - non-current 9,722 7,429
Other assets 11,770 13,242
--------- ---------
TOTAL ASSETS $ 534,167 $ 523,408
========= =========
LIABILITIES
Accounts payable $ 21,919 $ 22,064
Income taxes payable 11,096 --
Notes payable and capitalized leases - current 1,071 1,201
Client fund obligations 36,648 36,108
Accrued expenses 31,187 36,542
Liabilities of discontinued operations 288 64
--------- ---------
Total current liabilities 102,209 95,979
Bank debt 50,000 55,000
Notes payable and capitalized leases - non-current 905 951
Accrued expenses 815 831
--------- ---------
TOTAL LIABILITIES 153,929 152,761
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock 949 949
Additional paid-in capital 439,142 439,136
Accumulated deficit (58,489) (67,906)
Treasury stock (1,308) (1,308)
Other accumulated comprehensive loss (56) (224)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 380,238 370,647
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 534,167 $ 523,408
========= =========
See the accompanying notes to the condensed consolidated financial statements.
3
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED,
MARCH 31,
2002 2001
--------- ---------
Revenue $ 144,162 162,147
Operating expenses 117,503 122,031
--------- ---------
Gross margin 26,659 40,116
Corporate general and administrative 4,870 4,821
Depreciation and amortization 5,225 10,095
--------- ---------
Operating income 16,564 25,200
Other income (expense):
Interest expense (818) (2,549)
Gain (loss) on sale of operations, net 1,139 (2,345)
Other income, net 527 1,148
--------- ---------
Total other income (expense), net 848 (3,746)
Income from continuing operations before
income tax expense 17,412 21,454
Income tax expense 7,463 12,104
--------- ---------
Income from continuing operations 9,949 9,350
Loss from operations of discontinued operations,
net of tax (188) (3)
Loss on disposal of discontinued operations, net of tax (344) --
--------- ---------
Net income $ 9,417 9,347
========= =========
Earnings per share:
Basic:
Continuing operations $ 0.10 0.10
Discontinued operations -- --
--------- ---------
Net income $ 0.10 0.10
========= =========
Diluted:
Continuing operations $ 0.10 0.10
Discontinued operations -- --
--------- ---------
Net income $ 0.10 0.10
========= =========
Weighted-average common shares outstanding:
Basic 94,880 94,825
========= =========
Diluted 97,112 95,301
========= =========
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)
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
-------- --------
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES ........ $ 1,919 12,313
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from notes receivable ........................... 519 117
Business acquisitions, net of cash acquired and contingent
consideration .......................................... -- (1,246)
Proceeds from dispositions of businesses ................. 2,122 2,350
Additions to property and equipment, net ................. (3,206) (3,366)
-------- --------
Net cash used in investing activities .................. (565) (2,145)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt .................................. 7,100 9,500
Proceeds from notes payable and capitalized leases ....... -- 55
Payment of bank debt ..................................... (12,100) (27,000)
Payment of notes payable and capitalized leases .......... (176) (712)
Proceeds from stock issuances, net ....................... 6 17
-------- --------
Net cash used in financing activities .................. (5,170) (18,140)
-------- --------
Net decrease in cash and cash equivalents ................... (3,816) (7,972)
Cash and cash equivalents at beginning of period ............ 4,330 15,970
-------- --------
Cash and cash equivalents at end of period .................. $ 514 7,998
======== ========
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) as of March 31, 2002 and December 31,
2001, and the results of their operations and cash flows for the
three-month periods ended March 31, 2002 and 2001. The results of
operations for such interim periods are not necessarily indicative of
the results for the full year. The accompanying unaudited condensed
consolidated interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and with instructions to Form 10-Q, and accordingly
do not include all disclosures required by generally accepted
accounting principles. The December 31, 2001 condensed consolidated
balance sheet was derived from CBIZ's audited consolidated balance
sheet, giving effect to the business unit included in the Business
Solutions segment which is being accounted for as a discontinued
operation. For further information, refer to the consolidated financial
statements and footnotes thereto included in CBIZ's annual report on
Form 10-K for the year ended December 31, 2001. Also see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of critical accounting policies.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates. Certain reclassifications have been made to the 2001
financial statements to conform to the 2002 presentation.
6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(continued)
2. DIVESTITURES
During the first quarter of 2002, CBIZ completed the sale of six
non-core business operations for an aggregate price of $5.7 million,
which resulted in a pretax gain of $1.1 million. Since these
divestitures were initiated prior to January 1, 2002 (and the adoption
of SFAS 144, "Accounting for the Impairment of or Disposal of
Long-Lived Assets"), the net gain associated with these transactions is
included in income from continuing operations in the accompanying
condensed consolidated statements of operations.
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. In addition, CBIZ
completed the sale of The Continuous Learning Group and Envision
Development Group (collectively, CLG) on April 1, 2001, which resulted
in an additional pretax charge of $2.2 million in the first quarter of
2001. The aforementioned gains and losses have been included in gain
(loss) on sale of operations, net 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, 2001. There
have been no significant developments in such claims or suits during
the first quarter of 2002. 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). 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
MARCH 31,
2002 2001
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Numerator:
----------
Net income $ 9,417 $ 9,347
Denominator:
------------
Basic:
Weighted average common
Shares 94,880 94,825
------- -------
Diluted:
Options 2,232 402
Contingent shares -- 74
------- -------
Total 97,112 95,301
======= =======
7
CENTURY BUSINESS SERVICES, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(continued)
5. GOODWILL AND RELATED ADOPTION OF SFAS 142
Effective January 1, 2002, CBIZ adopted the non-amortization provisions
of SFAS 142, and accordingly ceased the amortization of our remaining
goodwill balance. During the second quarter of 2002, CBIZ will finalize
the first of the required impairment tests of goodwill as of January 1,
2002.
The following table sets forth reported net income and earnings per
share, as adjusted to exclude goodwill amortization expense (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2002 2001
--------- ---------
Net income, as reported $ 9,417 9,347
Goodwill amortization,
net of tax -- 5,212
--------- ---------
Net income, as adjusted $ 9,417 14,559
========= =========
Basic earnings per share -
Net income, as reported $ 0.10 0.10
Goodwill amortization,
net of tax -- 0.05
--------- ---------
Net income, as adjusted $ 0.10 0.15
========= =========
Diluted earnings per share -
Net income, as reported $ 0.10 0.10
Goodwill amortization,
net of tax -- 0.05
--------- ---------
Net income, as adjusted $ 0.10 0.15
========= =========
6. CONSOLIDATION AND INTEGRATION CHARGES
Consolidation and integration reserve balances as of December 31, 2001,
activity during the three-month period ended March 31, 2002, and the
remaining reserve balances as of March 31, 2002, were as follows (in
thousands):
1999 Plan Other Plans
-------------------- -------------------
Lease Lease
Consolidation Consolidation
-------------------- -------------------
Reserve balance at December 31, 2001...... 1,097 2,295
Amounts adjusted to income............. (10) 1,785
Payments............................... (205) (51)
-------------------- -------------------
Reserve balance at March 31, 2002......... 882 4,029
==================== ===================
During the fourth quarter of fiscal 1999, CBIZ's Board of Directors
approved a plan (the 1999 Plan) to consolidate several operations in
multi-office markets and integrate certain back-office functions into a
shared-services center. The plan included the consolidation of at least
60 office locations, the elimination of more than 200 positions
(including Corporate), and the divestiture of four small, non-core
businesses. Pursuant to the plan, CBIZ 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.
8
CENTURY BUSINESS SERVICES, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(continued)
6. CONSOLIDATION AND INTEGRATION CHARGES (continued)
In the first quarter of 2001, CBIZ reduced approximately $0.5 million
of accruals related to noncancellable lease obligations, due to the
fact that the consolidations in the San Jose and St. Louis markets
would not be completed within the original timeframe. CBIZ also reduced
approximately $0.1 million of accruals related to severance due to the
accrual being higher than actual severance expense for those
consolidations that had been completed.
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. In the
first quarter of 2001, expenses were incurred related to certain
consolidation charges that are required to be expensed as incurred, and
severance. In the first quarter of 2002, CBIZ recorded charges of $1.7
million for accruals related to noncancellable lease obligations
related to the Kansas City consolidation, and $0.4 million related to
various other lease-related expenses.
Consolidation and integration charges incurred for the three-months
ended March 31, 2002 and 2001 were as follows (in thousands):
2002 2001
----------------------- ---------------------------
Corporate Corporate
Operating G&A Operating G&A
expense expense expense expense
------- ----- ------- -------
Consolidation and integration
charges not in 1999 Plan:
Severance expense 40 -- -- 93
Lease consolidation and abandonment 2,066 -- 88 --
------- ----- ------- -------
Subtotal $ 2,106 -- 88 93
Consolidation and integration
charges in 1999 Plan:
Adjustment to lease accrual (10) -- (487) --
Adjustment to severance accrual -- -- (52) 57
------- ----- ------- -------
Total consolidation and
integration charges $ 2,096 -- (451) 150
======= ===== ======= =======
7. SEGMENT REPORTING
CBIZ business units are aggregated into three reportable divisions:
Business Solutions, Benefits and Insurance, and National Practices.
Segment information for the three-month periods ended March 31, 2002
and 2001 is as follows (in thousands):
9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(continued)
7. SEGMENT REPORTING (continued)
-------------------------------------------------------------
March 31, 2002
-------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and other Total
--------- --------- --------- --------- ---------
Revenue ......................................... $ 73,087 $ 36,784 $ 34,291 $ -- $ 144,162
Operating expenses .............................. 51,245 30,958 31,975 3,325 117,503
--------- --------- --------- --------- ---------
Gross margin ................................ 21,842 5,826 2,316 (3,325) 26,659
Corporate general and administrative ............ -- -- -- 4,870 4,870
Depreciation and amortization ................... 1,081 1,225 837 2,082 5,225
--------- --------- --------- --------- ---------
Operating income (loss) .................... 20,761 4,601 1,479 (10,277) 16,564
Other income (expense):
Interest expense .............................. (14) (22) (24) (758) (818)
Gain on sale of operations, net ................ -- -- -- 1,139 1,139
Other income, net .............................. 60 94 293 80 527
--------- --------- --------- --------- ---------
Total other income, net ................... 46 72 269 461 848
--------- --------- --------- --------- ---------
Income (loss) from continuing operations, before
taxes ........................................... $ 20,807 $ 4,673 $ 1,748 $ (9,816) $ 17,412
========= ========= ========= ========= =========
-------------------------------------------------------------
March 31, 2001
-------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and other Total
--------- --------- --------- --------- ---------
Revenue ......................................... $ 81,082 $ 39,581 $ 41,484 $ -- $ 162,147
Operating expenses .............................. 52,869 30,286 37,190 1,686 122,031
--------- --------- --------- --------- ---------
Gross margin ............................... 28,213 9,295 4,294 (1,686) 40,116
Corporate general and administrative ............ -- -- -- 4,821 4,821
Depreciation and amortization ................... 1,084 955 837 7,219 10,095
--------- --------- --------- --------- ---------
Operating income (loss) .................... 27,129 8,340 3,457 (13,726) 25,200
Other income (expense):
Interest expense .............................. (22) (60) (19) (2,448) (2,549)
Loss on sale of operations, net ................ -- -- -- (2,345) (2,345)
Other income (expense), net .................... 237 685 593 (367) 1,148
--------- --------- --------- --------- ---------
Total other income (expense), net ........ 215 625 574 (5,160) (3,746)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations, before
taxes ........................................... $ 27,344 $ 8,965 $ 4,031 $ (18,886) $ 21,454
========= ========= ========= ========= =========
8. DISCONTINUED OPERATIONS
CBIZ adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," effective January 1, 2002. SFAS 144 addresses
financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, as well as the
accounting and reporting of discontinued operations.
10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-(continued)
8. DISCONTINUED OPERATIONS (continued)
In March of 2002, CBIZ adopted a formal plan to close a small business
unit in our Business Solutions segment, which was no longer part of
CBIZ's strategic long-term growth objectives. The business unit was
reported as a discontinued operation and the net assets and liabilities
and results of operations are reported separately in the unaudited
condensed consolidated financial statements. Based on the estimated
cost of closure, CBIZ recorded a $344,000 loss on disposal, net of tax,
from discontinued operations. Revenues from the discontinued operations
for the three month period ended March 31, 2002 and 2001 were $0.1
million and $0.2 million, respectively.
At March 31, 2002 and 2001, the net assets and liabilities of this
business unit consisted of the following (in thousands):
MARCH 31,
2002 2001
---- ----
Accounts receivable, net 247 712
Other assets 20 36
--- ---
Assets of discontinued operation 267 748
=== ===
Accounts payable 134 52
Accrued expenses 154 12
--- ---
Liabilities of discontinued operation 288 64
=== ===
9. SUBSEQUENT EVENTS
Subsequent to March 31, 2002, 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 a waiver of default arising out of its
non-compliance with the interest coverage and EBITDA requirements for
the period ended March 31, 2002. The amendment also provided for the
following changes to the credit facility: 1) minimum EBITDA targets
were reset for the periods ended March 31, 2002, and each quarter
thereafter; 2) the covenant that ties the level of borrowing to the
level of accounts receivable was revised so that the borrowing base
excludes work-in-process balances; 3) the loan commitment was reduced
from $90 million to $75 million at March 31, 2002, with a subsequent
planned reduction to $60 million at September 30, 2002; 4) the leverage
ratio was reset for the quarter ended March 31, 2002 and thereafter;
5) the interest coverage ratio was reset for the period ended March 31,
2002 and each quarter thereafter; and 6) the applicable margin
pertaining to interest rates and commitment fees was increased based on
the funded debt to EBITDA ratio for each level on the pricing grid.
At March 31, 2002, CBIZ had $50 million outstanding under its credit
facility. Management believes that available funds under its credit
facility, along with cash generated from operations, will be sufficient
to meet its liquidity needs in the foreseeable future. Management also
expects to continue to further reduce the outstanding balance on the
credit facility with cash generated from operations.
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 subsidiaries 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 and in Toronto, Canada. 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; human resources consulting; valuation services, litigation advisory
services; medical practice management; worksite marketing; and capital advisory
services.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
Revenues
Total revenue decreased to $144.2 million for the three-month period ended March
31, 2002, from $162.1 million for the comparable period in 2001, a decrease of
$17.9 million, or 11.1%. The decrease was primarily attributable to (i)
divestitures completed during and subsequent to the first quarter of 2001, which
accounted for approximately $13.3 million of such decrease, (ii) lower revenues
at certain business units, and (iii) changes in IRS regulations that
discontinued the requirement to file the Form 5500 for cafeteria-style benefit
plans, which affected our business solutions group. For business units with a
full period of operations for the three-month periods ended March 31, 2002 and
2001, revenues decreased $4.6 million, or 3.2%. The decrease was concentrated in
the Business Solutions Group and to some extent in the Capital Markets group
within National Practices. The decline in same unit revenue for Business
Solutions was primarily related to four operating units which aggregated a $3.9
million revenue decline in the quarter. The Capital Markets group, which
continues to be impacted by weak market conditions, reported revenue $1.1
million lower than in the first quarter of 2001. The pipeline for transactions
in Capital Markets is strong, and results are expected to improve in future
quarters.
Expenses
Operating expenses decreased to $117.5 million for the three-month period ended
March 31, 2002, from $122.0 million for the comparable period in 2001, a
decrease of $4.5 million, or 3.7%. As a percentage of revenue, operating
expenses for the three-month period ended March 31, 2002 were 81.5%, compared to
75.3% for the comparable period. Operating expense as a percentage of revenue
increased due to higher levels of compensation carried throughout the first
quarter of 2002, in anticipation of higher revenues that were not realized.
Compensation expense is expected to come back in line with revenue levels in
future quarters, based on expense reductions that will be implemented beginning
in the second quarter. The primary components of operating expenses are
personnel costs and occupancy expense. Other operating costs such as direct
costs have decreased due to decreased sales.
Corporate general and administrative expenses increased to $4.9 million for the
three-month period ended March 31, 2002, from $4.8 million for the comparable
period in 2001. Corporate general and administrative expenses represented 3.4%
of total revenues for the three-month period ended March 31, 2002, up from 3.0%
for the comparable period in 2001, respectively. The increase in corporate
general and administrative costs was primarily driven by an increase in legal
costs, due to the cost to pursue non-competition violations by former employees.
The increase in legal costs was somewhat offset by the reduction in compensation
expense at corporate.
Depreciation and amortization expense decreased to $5.2 million for the
three-month period ended March 31, 2002, from $10.1 million for the comparable
period in 2001, a decrease of $4.9 million, or 4.8%. The decrease is primarily
attributable to the $5.5 million decrease in goodwill amortization (pretax),
resulting from the adoption of SFAS No. 142, which accordingly ceased the
amortization of goodwill effective January 1, 2002. The decrease is primarily
offset by an increase in depreciation expense of $0.7 million related to capital
expenditures. As a percentage of total revenues, depreciation and amortization
expense was 3.6% for the three-month period ended March 31, 2002, compared to
6.2% for the comparable period in 2001.
Interest expense decreased to $0.8 million for the three-month period ended
March 31, 2002, from $2.5 million for the comparable period in 2001, a decrease
of $1.7 million, or 67.9%. The decrease is the result of a lower average
outstanding debt of $53.5 million during the first quarter of 2002, compared to
$113.9 million during the
12
first quarter of 2001, and a lower average interest rate of 5.8% during the
first quarter of 2002, compared to 8.4% during the first quarter of 2001.
Gain on sale of operations, net was $1.1 million for the three-month period
ended March 31, 2002, and was related to the sale of six non-core operations.
The loss on sale of operations, net of $2.3 million for the three-month period
ended March 31, 2001, was related to the sale of three smaller non-core
businesses and the sale of an additional operation that closed in April 2001.
See Note 2 to CBIZ's condensed consolidated financial statements included
herewith.
Other income, net decreased to $0.5 million for the three-month period ended
March 31, 2002, from $1.1 million for the comparable period in 2001, a decrease
of $0.6 million, or 54.1%. Other income, net is comprised primarily of interest
income and miscellaneous income. The decrease is primarily related to a decrease
in interest income of $0.6 million, to $0.4 million for the three-month period
ended March 31, 2002 due to lower interest rates. Interest income is primarily
derived from earnings related to CBIZ's payroll business.
CBIZ recorded income taxes from continuing operations of $7.5 million for the
three-month period ended March 31, 2002, compared to $12.1 million for the
comparable period in 2001. The effective tax rate decreased to 42.9% for the
three-month period ended March 31, 2002, from 56.4% for the comparable period in
2001 due to the implementation of SFAS 142, which ceased the amortization of
goodwill. The effective tax rate in 2001 is higher than the statutory federal
and state tax rates of approximately 40%, primarily due to the significant
amount of goodwill amortization expense, the majority of which is not deductible
for tax purposes. Income taxes are provided based on CBIZ's anticipated annual
effective rate.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
In March of 2002, CBIZ adopted a formal plan to close a small business unit in
our Business Solution segment, which was no longer part of CBIZ's strategic
long-term growth objectives. The business unit was reported as a discontinued
operation and the net assets and liabilities and results of operations are
reported separately in the unaudited condensed consolidated financial
statements. Based on the estimated cost of closure, CBIZ recorded a $344,000
loss on sale, net of tax, from discontinued operations. Revenues from the
discontinued operations for the three month period ended March 31, 2002 and 2001
were $0.1 million and $0.2 million, respectively.
OTHER
Total assets increased to $534.2 million at March 31, 2002, from $523.4 million
at December 31, 2001, primarily attributable to the increase in accounts
receivable, net, of $15.1 million, which is consistent with the seasonality of
the accounting and tax business. Total liabilities increased approximately $0.9
million, primarily due to an increase in income taxes payable offset by the
decrease in bank debt of $5.0 million. Total stockholders' equity increased
approximately $9.6 million, primarily due to net income for the first three
months of 2002 of $9.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $3.8 million to $0.5 million at March 31,
2002, from $4.3 million at December 31, 2001. Net cash provided by operating
activities for the three months ended March 31, 2002 was $1.9 million, as
compared to $12.3 million in 2001, a decrease of $10.4 million. In line with
management's objective of reducing debt, net cash provided by operating
activities, combined with proceeds from divestitures, was used as the principal
source of funds used to reduce CBIZ's bank debt.
Cash used in investing activities of $0.6 million during the three months ended
March 31, 2002, consisted primarily of proceeds from the disposition of six
businesses for $2.1 million, offset by cash used to fund capital expenditures.
Capital expenditures consisted of leasehold improvements and equipment in
connection with the consolidation of offices in the Philadelphia area, growth in
the medical billing practice, and equipment purchases in relation to normal
replacement.
Cash used in investing activities of $2.1 million during the three months ended
March 31, 2001, consisted primarily of proceeds from the disposition of three
businesses for $2.4 million, offset by cash used for contingent consideration of
business acquired ("earn outs") and capital expenditures. Capital expenditures
consisted of leasehold improvements and equipment in connection with the
consolidation of certain offices and equipment purchases in relation to normal
replacement.
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During the three months ended March 31, 2002, cash used in financing activities
consisted of a net reduction in the credit facility of $5.0 million and net
payments of $0.2 million used toward the reduction of notes payable and
capitalized leases. During the last twelve months, CBIZ reduced bank debt by
$50.0 million, from $100.0 million at March 31, 2001 to $50.0 million at March
31, 2002.
During the three months ended March 31, 2001, cash used in financing activities
consisted of a net reduction in the credit facility of $17.5 million and net
payments of $0.7 million used toward the reduction of notes payable and
capitalized leases.
SOURCES AND USES OF CASH
CBIZ's principal source of net operating cash is derived from the collection of
fees from professional services rendered to its clients and commissions earned
in the areas of accounting, tax, valuation and advisory services, benefits
consulting and administration services, insurance, human resources and payroll
solutions, capital advisory, retirement and wealth management services and
technology solutions.
CBIZ's bank line of credit is a $75.0 million revolving credit facility with
several financial institutions, of which $50.0 million was outstanding at March
31, 2002. CBIZ's credit facility is subject to commitment reductions, in
connection with business assets that are divested, by an amount equal to the net
proceeds from divestitures. Additionally, the credit facility has a planned
commitment reduction on September 30, 2002, which will bring the facility to
$60.0 million.
At March 31, 2002, CBIZ had $50 million outstanding under its credit facility.
Management believes that those available funds, along with cash generated from
operations, will be sufficient to meet its liquidity needs in the foreseeable
future. Management also expects to continue to further reduce the outstanding
balance on the credit facility with cash generated from operations.
Subsequent to March 31, 2002, 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 a
waiver of default arising out of its non-compliance with the interest coverage
and EBITDA requirements for the period ended March 31, 2002. The amendment also
provided for the following changes to the credit facility: 1) minimum EBITDA
targets were reset for the periods ended March 31, 2002, and each quarter
thereafter; 2) the covenant that ties the level of borrowing to the level of
accounts receivable was revised so that the borrowing base excludes
work-in-process balances; 3) the loan commitment was reduced from $90 million to
$75 million at March 31, 2002, with a subsequent planned reduction to $60
million at September 30, 2002; 4) the leverage ratio was reset for the quarter
ended March 31, 2002 and thereafter; 5) the interest coverage ratio was reset
for the period ended March 31, 2002 and each quarter thereafter; and 6) the
applicable margin pertaining to interest rates and commitment fees was increased
based on the funded debt to EBITDA ratio for each level on the pricing grid.
Critical Accounting Policies
Revenue Recognition
Revenue is recognized only when all of the following are present: persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, our fee to the client is fixed or determinable, and collectibility is
reasonably assured. CBIZ offers a vast array of products and outsourced business
services to its clients. Those services are delivered through three segments. A
description of revenue recognition, as it relates to those segments, is provided
below:
Business Solutions - Revenue consists primarily of fees for accounting
services, preparation of tax returns and consulting services. Revenues are
recorded in the period in which they are earned. CBIZ bills clients based
upon a predetermined agreed upon fixed fee or actual hours incurred on
client projects at expected net realizable rates per hour, plus any
out-of-pocket expenses. The cumulative impact on any subsequent revision in
the estimated realizable value of unbilled fees for a particular client
project is reflected in the period in which the change becomes known.
Benefits & Insurance - Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans.
Commissions relating to brokerage and agency activities whereby CBIZ has
primary responsibility for the collection of premiums from insureds are
generally recognized as of the latter of the effective date of the
insurance policy or the date billed to the customer. Commissions to be
received directly from insurance companies are generally recognized when
the amounts are determined. Life insurance commissions are recorded on the
accrual basis. Commission revenue is reported net of sub-broker
commissions. Contingent commissions are generally recognized when received.
Fee income is recognized as services are rendered.
National Practices - The business units that comprise this division offer a
variety of services. A description of revenue recognition associated with
the primary services is provided below:
- Mergers & Acquisitions and Capital Advisory - Revenue associated
with non-refundable retainers are recognized on a straight-line
basis over the life of the engagement. Revenue associated with
success fee transactions are recognized when the transaction is
completed.
- Technology Consulting - Revenue associated with hardware and
software sales are recognized upon delivery and acceptance.
Revenue associated with installation and service agreements are
recognized as services are performed. Consulting revenue is
recognized on an hourly or per diem fee basis.
- Valuation and Property Tax - Revenue associated with retainer
contracts are recognized on a straight-line basis over the life of
the contract, which is generally twelve months. Revenue associated
with contingency arrangements is recognized once written
notification is received from an outside third party (e.g.,
assessor in the case of a property tax engagement) acknowledging
that the revenue cycle has been completed.
- Surety - Revenue is recognized as bonds are written. With regard
to a retrospective contingent arrangement with a certain carrier,
revenue is recognized based on performance measured by comparing
loss ratios for each respective underwriting year to target loss
ratios set by the carrier.
- Physician Practice Management - Revenue is recognized when
collections are received on our clients' patient accounts.
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Valuation of Accounts Receivable
The preparation of condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Specifically, management must make
estimates of the collectability of our accounts receivable, including
work-in-progress (unbilled accounts receivable), related to current period
service revenue. Management analyzes historical bad debts, client
credit-worthiness, and current economic trends and conditions when evaluating
the adequacy of the allowance for doubtful accounts. 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. Our accounts receivable balance was $132.6 million, net of
allowance for doubtful accounts of $15.1 million as of March 31, 2002.
Valuation of Goodwill
At March 31, 2002, CBIZ had approximately $245.3 million of goodwill associated
with prior acquisitions. Effective January 1, 2002, CBIZ adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets", and accordingly, ceased amortization of our remaining
goodwill balance and are in process of evaluating our goodwill for impairment
using the new fair value impairment guidelines of SFAS 142. This change to a new
method of accounting for goodwill could result in an impairment charge in fiscal
2002, although such charge (if any) has yet to be determined.
Loss Contingencies
Loss contingencies, including litigation claims, are recorded as liabilities
when it is probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Disclosure is required when there is a reasonable
possibility that the ultimate loss will exceed the recorded provision.
Contingent liabilities are often resolved over long time periods. Estimating
probable losses requires analysis that often depends on judgment about potential
actions by third parties.
Other Significant Policies
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the consolidated financial statements. Those policies are
described in Note 1 to the consolidated financial statements contained in our
annual report on Form 10-K for the year ended December 31, 2001.
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 phases of similar import. Such statements are
subject to certain risks, uncertainties or assumptions. Should one or more of
these risks or assumptions materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Such risks and uncertainties include, but are not limited to,
CBIZ's ability to adequately manage its growth; CBIZ's dependence on the
services of its CEO and other key employees; competitive pricing pressures;
general business and economic conditions; and changes in governmental regulation
and tax laws affecting its 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
CBIZ's exposure to market risk, including interest rate risk, is not
significant. If market interest rates were to increase or decrease immediately
and uniformly by 100 basis points from the levels at March 31, 2002, in each
case the impact on CBIZ's financial condition and results of operations would
not be significant. CBIZ does not engage in trading market risk sensitive
instruments. CBIZ does not purchase instruments, hedges, or "other than trading"
instruments that are likely to expose CBIZ to market risk, whether interest
rate, foreign currency exchange, commodity price or equity price risk. CBIZ has
not issued debt instruments, entered into forward or futures contracts,
purchased options or entered into swaps. 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.
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 March 31, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Business Services, Inc.
-------------------------------
(Registrant)
Date: May 15, 2002 By: /s/ WARE H. GROVE
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Ware H. Grove
Chief Financial Officer
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