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 June 30, 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
---------------------- ----------------------
Commission file number 0-25890
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CENTURY BUSINESS SERVICES, INC.
- --------------------------------------------------------------------------------
(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
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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 July 31, 2002
--------------------- --------------
Par value $.01 per share 95,743,251
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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 --
June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations --
Three and Six Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2002 and 2001 5
Notes to the Condensed Consolidated Financial
Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
Item 3. Quantitative and Qualitative Information about
Market Risk 18
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 19
2
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
Cash and cash equivalents $ 4,904 $ 4,340
Restricted cash and funds held for clients 55,406 50,847
Accounts receivable, less allowance for doubtful
accounts of $12,332 and $12,982 117,968 116,734
Notes receivable -- current 2,027 2,260
Income taxes recoverable -- 2,798
Deferred income taxes 7,528 6,213
Other current assets 12,224 11,279
Assets of discontinued operations 629 2,176
--------- -----------
Total current assets 200,686 196,647
Goodwill, net of accumulated amortization 155,792 247,462
Property and equipment, net of accumulated
depreciation of $43,755 and $39,237 50,122 53,699
Notes receivable -- non-current 8,170 5,000
Deferred income taxes -- non-current 17,765 7,427
Other assets 11,892 13,173
--------- -----------
TOTAL ASSETS $ 444,427 $ 523,408
========= ===========
LIABILITIES
Accounts payable $ 24,028 $ 21,959
Income taxes payable 3,220 --
Notes payable and capitalized leases -- current 559 1,201
Client fund obligations 45,217 36,108
Accrued expenses 34,351 36,387
Liabilities of discontinued operations 254 324
--------- -----------
Total current liabilities 107,629 95,979
Bank debt 33,000 55,000
Notes payable and capitalized leases -- non-current 988 951
Accrued expenses 766 831
--------- -----------
TOTAL LIABILITIES 142,383 152,761
--------- -----------
STOCKHOLDERS' EQUITY
Capital stock 951 949
Additional paid-in capital 439,666 439,136
Accumulated deficit (136,916) (67,906)
Treasury stock (1,308) (1,308)
Accumulated other comprehensive loss (349) (224)
--------- -----------
TOTAL STOCKHOLDERS' EQUITY 302,044 370,647
--------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,427 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenue $ 127,004 $ 131,600 $ 270,424 $ 292,683
Operating expenses 113,561 112,538 230,358 233,721
--------- --------- --------- ---------
Gross margin 13,443 19,062 40,066 58,962
Corporate general and administrative 5,159 4,379 10,029 9,200
Depreciation and amortization 5,144 10,361 10,350 20,438
--------- --------- --------- ---------
Operating income 3,140 4,322 19,687 29,324
Other income (expense):
Interest expense (653) (1,848) (1,471) (4,397)
Gain (loss) on sale of operations, net 86 945 1,110 (1,400)
Other income, net 1,157 1,275 1,701 2,420
--------- --------- --------- ---------
Total other income (expense), net 590 372 1,340 (3,377)
Income from continuing operations before
income tax expense 3,730 4,694 21,027 25,947
Income tax expense 1,582 2,617 9,047 14,640
--------- --------- --------- ---------
Income from continuing operations 2,148 2,077 11,980 11,307
Income (loss) from operations of discontinued businesses,
net of tax (120) (113) (308) 4
Loss on disposal of discontinued businesses, net of tax (892) -- (1,236) --
--------- --------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle 1,136 1,964 10,436 11,311
Cumulative effect of a change in accounting principle,
net of tax -- -- (79,446) --
--------- --------- --------- ---------
Net income (loss) $ 1,136 $ 1,964 $ (69,010) $ 11,311
========= ========= ========= =========
Earnings (loss) per share:
Basic:
Continuing operations $ 0.02 $ 0.02 $ 0.13 $ 0.12
Discontinued operations (0.01) -- (0.02) --
Cumulative effect of change in accounting principle -- -- (0.84) --
--------- --------- --------- ---------
Net income (loss) $ 0.01 $ 0.02 $ (0.73) $ 0.12
========= ========= ========= =========
Diluted:
Continuing operations $ 0.02 $ 0.02 $ 0.12 $ 0.12
Discontinued operations (0.01) -- (0.01) --
Cumulative effect of change in accounting principle -- -- (0.82) --
--------- --------- --------- ---------
Net income (loss) $ 0.01 $ 0.02 $ (0.71) $ 0.12
========= ========= ========= =========
Basic weighted average shares outstanding 95,005 94,903 94,945 94,903
========= ========= ========= =========
Diluted weighted average shares outstanding 97,595 97,099 97,349 96,167
========= ========= ========= =========
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)
SIX MONTHS ENDED
JUNE 30,
------------------
2002 2001
-------- -------
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES $ 24,673 30,280
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired and
contingent consideration on prior transactions -- (1,466)
Additions to property and equipment, net (6,341) (5,987)
Proceeds from dispositions of businesses 3,622 11,772
Proceeds from notes receivable 683 182
-------- -------
Net cash (used in) provided by investing activities (2,036) 4,501
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 14,000 17,900
Proceeds from notes payable and capitalized leases 265 84
Payment of bank debt (36,000) (58,600)
Payment of notes payable and capitalized leases (870) (1,432)
Proceeds from stock issuances, net -- 29
Proceeds from exercise of stock options and warrants, net 532 115
-------- -------
Net cash used in financing activities (22,073) (41,904)
-------- -------
Net increase (decrease) in cash and cash equivalents 564 (7,123)
Cash and cash equivalents at beginning of period 4,340 15,970
-------- -------
Cash and cash equivalents at end of period $ 4,904 8,847
======== =======
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 June 30, 2002 and December 31, 2001, the results of
their operations for the three and six-month periods ended June 30, 2002 and
2001, and cash flows for the six-month periods ended June 30, 2002 and 2001.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year. The accompanying unaudited
condensed consolidated interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and with instructions to Form 10-Q, and accordingly do
not include all disclosures required by generally accepted accounting
principles. The December 31, 2001 condensed consolidated balance sheet was
derived from CBIZ's audited consolidated balance sheet, giving effect to
certain operations included in the Business Solutions segment which are being
accounted for as discontinued operations. For further information, refer to
the consolidated financial statements and footnotes thereto included in
CBIZ's annual report on Form 10-K for the year ended December 31, 2001
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. Certain
reclassifications have been made to the 2001 financial statements to conform
to the 2002 presentation. Also, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of critical
accounting policies.
2. GOODWILL AND RELATED ADOPTION OF SFAS 142
Effective January 1, 2002, CBIZ adopted the non-amortization provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangibles: (SFAS 142), and accordingly ceased the amortization of our
remaining goodwill balance. The following table sets forth reported net
income and earnings per share, as adjusted to exclude goodwill amortization
expense and goodwill impairment (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
-------------------------- ------------------------------
2002 2001 2002 2001
--------- -------- ---------- ---------
Net income (loss), as reported $ 1,136 1,964 $ (69,010) 11,311
Goodwill amortization, net of tax -- 5,115 -- 10,328
Goodwill impairment, net of tax -- -- 79,446 --
--------- -------- ---------- ---------
Net income, as adjusted $ 1,136 7,079 $ 10,436 21,639
========= ======== ========== =========
Basic earnings per share --
Net income (loss), as reported $ 0.01 0.02 $ (0.73) 0.12
Goodwill amortization, net of tax $ -- 0.05 $ -- 0.11
Goodwill impairment, net of tax -- -- 0.84 --
--------- -------- ---------- ---------
Net income, as adjusted $ 0.01 0.07 $ 0.11 0.23
========= ======== ========== =========
Diluted earnings per share --
Net income (loss), as reported $ 0.01 0.02 $ (0.71) 0.12
Goodwill amortization, net of tax $ -- 0.05 $ -- 0.11
Goodwill impairment, net of tax -- -- 0.82 --
--------- -------- ---------- ---------
Net income, as adjusted $ 0.01 0.07 $ 0.11 0.23
========= ======== ========== =========
6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (continued)
Also in accordance with SFAS 142, CBIZ finalized the required transitional
impairment tests of goodwill during the second quarter of 2002, and recorded
an impairment charge of $88.6 million on a pre-tax basis. This non-cash
charge is non-operational in nature and is reflected as a cumulative effect
of a change in accounting principle, net of tax benefit of $9.1 million.
Under SFAS 142, goodwill impairment is deemed to exist if the net book value
of a reporting unit exceeds its estimated fair value. Fair value is
determined at the reporting unit level based on several valuation techniques,
including discounted cash flows, comparable market prices of similar
entities, and earnings and revenue multiples. This methodology of measuring
impairment differs from CBIZ's previous policy of using undiscounted cash
flows on an individual acquisition basis, as permitted under the accounting
standards applicable prior to the adoption of SFAS 142.
SFAS 142 requires an impairment test to be completed annually, subsequent to
the transitional impairment test applied upon adoption of the standard. The
annual impairment test for all reporting units will be completed in the
fourth quarter of 2002, and every fourth quarter thereafter.
The changes in the carrying amount of goodwill for the six-months ended June
30, 2002 are as follows (in thousands):
Business Benefits & National
Solutions Insurance Practices
(a) (b) (c) Total
--------- ---------- --------- -------
Balance as of January 1, 2002 $ 138,243 54,967 54,252 247,462
Less:
Impairment Charge (45,046) (10,863) (32,682) (88,591)
Goodwill written off related
to sale of an operation (2,704) (375) -- (3,079)
--------- ------- ------- --------
Balance as of June 30, 2002 $ 90,493 43,729 21,570 155,792
--------- ------- ------- --------
(a) Includes one reporting unit.
(b) Includes three reporting units.
(c) Includes nine reporting units.
3. CONSOLIDATION AND INTEGRATION CHARGES
Consolidation and integration reserve balances as of December 31, 2001,
activity during the six-month period ended June 30, 2002, and the remaining
reserve balances as of June 30, 2002, were as follows (in thousands):
1999 Plan Other Plans
------------- -------------
Lease Lease
Consolidation Consolidation
------------- -------------
Reserve balance at December 31, 2001 ....... 1,097 2,295
Amounts adjusted to income .............. 80 1,971
Payments ................................ (411) (334)
------ ------
Reserve balance at June 30, 2002 ........... 766 3,932
====== ======
1999 Plan
---------
During the fourth quarter of fiscal 1999, CBIZ's Board of Directors approved
a plan (the 1999 Plan) to consolidate several operations in multi-office
markets and integrate certain back-office functions into a shared-services
center. The plan included the consolidation of at least 60 office locations,
the elimination of more than 200 positions (including Corporate), and the
divestiture of four small, non-core businesses.
7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (continued)
During the six months ended June 30,2001, CBIZ reduced approximately $0.4
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. During the six months ended June 30,2002, CBIZ increased the lease
accrual related to the 1999 plan by $0.1 million based on changes in sublease
assumptions for the Atlanta market.
Other Plans
-----------
In addition to the consolidation activity described above that relates to the
1999 Plan, CBIZ has incurred expenses related to noncancellable lease
obligations in Columbia, Philadelphia, Kansas City, and San Diego. For the
six months ended June 30, 2002, CBIZ recorded a consolidation and integration
charge of $1.7 million related to the consolidation in Kansas City and $0.1
million related to the consolidation in San Diego pursuant to exit plans.
In addition to the establishment of these lease accruals, certain
consolidation expenses were incurred that are required to be expensed as
incurred. Consolidation and integration charges incurred for the three and
six-months ended June 30, 2002 and 2001 were as follows (in thousands):
Three Months Ended June 30,
-----------------------------
2002 2001
--------- -------------------
Corporate
Operating Operating G&A
expense expense expense
------- ------- -------
CONSOLIDATION AND INTEGRATION CHARGES
NOT IN 1999 PLAN:
Severance expense (12) 37 --
Lease consolidation and abandonment 417 59 --
Other consolidation charges 277 182 --
----- --------------
Subtotal $682 278 --
CONSOLIDATION AND INTEGRATION CHARGES
IN 1999 PLAN:
Adjustment to lease accrual 91 106 --
Adjustment to severance accrual -- -- (93)
----- ---------------
Total consolidation and
integration charges $773 384 (93)
===== ===============
Six Months Ended June 30,
------------------------------
2002 2001
--------- -------------------
Corporate
Operating Operating G&A
expense expense expense
------- ------- -------
CONSOLIDATION AND INTEGRATION CHARGES
NOT IN 1999 PLAN:
Severance expense 29 37 93
Lease consolidation and abandonment 2,427 82 --
Other consolidation charges 333 247 --
------ --------------
Subtotal $2,789 366 93
CONSOLIDATION AND INTEGRATION CHARGES
IN 1999 PLAN:
Adjustment to lease accrual 80 (381) --
Adjustment to severance accrual -- (52) (36)
------ --------------
Total consolidation and
integration charges $2,869 (67) 57
====== ==============
8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (continued)
4. CONTINGENCIES
CBIZ is from time to time subject to claims and suits arising in the ordinary
course of business. CBIZ is involved in certain legal proceedings as
described in Part I, "Item 3 -- Legal Proceedings" in our Annual Report on
Form 10-K for the year ended December 31, 2001. There have been no
significant developments in such claims or suits during the first six months
of 2002, other than the dismissal of certain class-action lawsuits discussed
below.
Since September 1999, seven purported stockholder class-action lawsuits were
filed against CBIZ and certain of its current and former directors and
officers, including Michael G. DeGroote, Charles D. Hamm, Jr., Gregory J.
Skoda, Keith W. Reeves, Fred M. Winkler, and Jerome P. Grisko, and have been
consolidated as In Re Century Business Services Securities Litigation, Case
No. 1:99CV2200, in the United States District Court for the Northern District
of Ohio. The plaintiffs alleged that the named defendants violated certain
provisions of the Securities Exchange Act of 1934 and certain rules
promulgated thereunder in connection with certain statements made during
various periods from February 1998 through January 2000 by, among other
things, improperly amortizing goodwill and failing adequately to monitor
changes in operating results. The consolidated complaint sought damages in an
unspecified amount. The United States District Court has dismissed the
consolidated actions and the matter is no longer pending against CBIZ.
Counsel for plaintiffs have indicated that they will appeal the dismissal.
CBIZ and the named officer and director defendants deny all allegations of
wrongdoing made against them in these actions and intend to vigorously defend
each of these lawsuits or appeals. Although the ultimate outcome of such
litigation is uncertain, based on the allegations contained in the
complaints, management does not believe that these lawsuits or appeals will
have a material adverse effect on the financial condition, results of
operations or cash flows of CBIZ.
5. EARNINGS (LOSS) PER SHARE
For the periods presented, CBIZ presents both basic and diluted earnings
(loss) per share. The following data shows the amounts used in computing
earnings (loss) per share and the effect on the weighted average number of
dilutive potential common shares (in thousands). Included in potential
dilutive common shares for 2001 are contingent shares, which represent shares
issued and placed in escrow that will not be released until certain
performance goals have been met. As of June 30, 2002, there were no
contingent shares remaining, as all shares related to acquisition "earn-outs"
have been released.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
BASIC
Weighted average common
shares 95,005 94,903 94,945 94,903
------ ------ ------ ------
DILUTED
Options 2,590 2,123 2,404 1,191
Contingent shares -- 73 -- 73
------ ------ ------ ------
Total 97,595 97,099 97,349 96,167
====== ====== ====== ======
9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (continued)
6. ACQUISITIONS
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 was being amortized over a 15-year period, prior to the adoption
of SFAS 142. As a result of the nature of the assets and liabilities of the
business acquired, there were no material identifiable intangible assets or
liabilities.
7. DIVESTITURES
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
second quarter of 2002, CBIZ completed the sale of one non-core business
operation for an aggregate price of $1.2 million, which resulted in a pretax
gain of $0.1 million. Since this divestiture did not meet the criteria for a
discontinued business, the net gain associated with this transaction 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. 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. The aforementioned gains and losses
have been included in gain (loss) on sale of operations in the accompanying
condensed consolidated statements of operations.
8. SEGMENT REPORTING
CBIZ business units are aggregated into three reportable segments: Business
Solutions; Benefits and Insurance; and National Practices. Segment
information for the three and six-month periods ended June 30, 2002 and 2001
are as follows (in thousands):
--------------------------------------------------------------------------
For the Three Months Ended June 30, 2002
--------------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
--------- ---------- --------- --------- ---------
Revenue $ 52,065 $ 39,158 $ 35,781 $ -- $ 127,004
Operating expenses 46,702 31,954 32,971 1,934 113,561
-------- -------- -------- -------- ---------
Gross margin 5,363 7,204 2,810 (1,934) 13,443
Corporate general and -- -- -- 5,159 5,159
administrative
Depreciation and amortization 1,311 1,060 861 1,912 5,144
-------- -------- -------- -------- ---------
Operating income 4,052 6,144 1,949 (9,005) 3,140
Other income (expense):
Interest expense (13) (20) (10) (610) (653)
Gain on sale of operations, net -- -- -- 86 86
Other income, net 81 20 244 812 1,157
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations, before taxes $ 4,120 $ 6,144 $ 2,183 $ (8,717) $ 3,730
======== ======== ======== ======== =========
10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (continued)
-------------------------------------------------------------------------
For the Three Months Ended June 30, 2001
-------------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
--------- ---------- --------- ---------- ---------
Revenue $ 56,968 $ 39,676 $ 34,956 $ -- $ 131,600
Operating expenses 49,256 30,076 31,959 1,247 112,538
-------- -------- -------- -------- ---------
Gross margin 7,712 9,600 2,997 (1,247) 19,062
Corporate general and -- -- -- 4,379 4,379
administrative
Depreciation and amortization 1,111 1,174 827 7,249 10,361
-------- -------- -------- -------- ---------
Operating income 6,601 8,426 2,170 (12,875) 4,322
Other income (expense):
Interest expense (23) (34) (22) (1,769) (1,848)
Gain on sale of operations, net -- -- -- 945 945
Other income, net 224 126 484 441 1,275
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations, before taxes $ 6,802 $ 8,518 $ 2,632 $(13,258) $ 4,694
======== ======== ======== ======== =========
-----------------------------------------------------------------------
For the Six Months Ended June 30, 2002
-----------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
--------- ---------- --------- --------- ---------
Revenue $ 124,410 $ 75,942 $ 70,072 $ -- $ 270,424
Operating expenses 97,241 62,912 64,946 5,259 230,358
--------- -------- -------- -------- ---------
Gross margin 27,169 13,030 5,126 (5,259) 40,066
Corporate general and -- -- -- 10,029 10,029
administrative
Depreciation and amortization 2,373 2,285 1,698 3,994 10,350
--------- -------- -------- -------- ---------
Operating income 24,796 10,745 3,428 (19,282) 19,687
Other income (expense):
Interest expense (27) (42) (34) (1,368) (1,471)
Gain on sale of operations, net
-- -- -- 1,110 1,110
Other income (expense) net 158 114 537 892 1,701
--------- -------- -------- -------- ---------
Income (loss) from continuing
operations, before taxes $ 24,927 $ 10,817 $ 3,931 $(18,648) $ 21,027
========= ======== ======== ======== =========
--------------------------------------------------------------------------
For the Six Months Ended June 30, 2001
--------------------------------------------------------------------------
Business Benefits & National Corporate
Solutions Insurance Practices and Other Total
--------- ---------- -------- --------- ---------
Revenue $ 136,985 $ 79,257 $ 76,441 $ -- $ 292,683
Operating expenses 101,276 60,362 69,148 2,935 233,721
--------- -------- -------- -------- ---------
Gross margin 35,709 18,895 7,293 (2,935) 58,962
Corporate general and -- -- -- 9,200 9,200
administrative
Depreciation and amortization 2,201 2,129 1,664 14,444 20,438
--------- -------- -------- -------- ---------
Operating income 33,508 16,766 5,629 (26,579) 29,324
Other income (expense):
Interest expense (45) (94) (41) (4,217) (4,397)
Loss on sale of operations, net -- -- -- (1,400) (1,400)
Other income (expense) net 458 811 1,077 74 2,420
--------- -------- -------- -------- ---------
Income (loss) from continuing
operations, before taxes $ 33,921 $ 17,483 $ 6,665 $(32,122) $ 25,947
========= ======== ======== ======== =========
11
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (continued)
9. DISCONTINUED OPERATIONS
CBIZ adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, as well as the accounting and reporting
of discontinued operations.
During the six month period ended June 30, 2002, CBIZ adopted formal plans to
close two small business units and divest of one non-core business unit in
the Business Solutions segment, which were no longer part of CBIZ's strategic
long-term growth objectives. The business units were reported as discontinued
operations and the net assets and liabilities and results of operations were
reported separately in the unaudited condensed consolidated financial
statements. In addition, CBIZ recorded a loss on the disposal of discontinued
operations of $0.9 million and $1.2 million, net of tax for the three and
six-month periods ended June 30, 2002, respectively.
Revenues from the discontinued operations for the three-month period ended
June 30, 2002 and 2001 were $0.3 million and $1.1 million, respectively.
Revenues from the discontinued operations for the six-month period ended June
30, 2002 and 2001 were $1.2 million and $2.4 million, respectively.
At June 30, 2002 and December 31, 2001, the net assets and liabilities of the
three business units classified of discontinued operations consisted of the
following (in thousands):
June 30, December 31,
2002 2001
-------- ------------
Accounts receivable, net $ 371 $1,458
Property and equipment, net 250 490
Other assets 8 228
------ ------
Assets of discontinued operation 629 2,176
====== ======
Accounts payable 118 155
Accrued expenses 136 169
------ ------
Liabilities of discontinued operation $ 254 $ 324
====== ======
12
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 -- CONTINUING OPERATIONS
- ----------------------------------------------
Revenues
Total revenue decreased to $127.0 million for the three-month period ended June
30, 2002, from $131.6 million for the comparable period in 2001, a decrease of
$4.6 million, or 3.5%. The decrease was primarily attributable to (i)
divestitures completed during and subsequent to the first quarter of 2001, (ii)
lower revenue at certain business units, and (iii) weak economic conditions,
which are primarily affecting the consulting and special project work provided
by our Business Solutions Group. The decrease in revenue attributable to
divestitures was $5.2 million for the three-month period ended June 30, 2002,
which was offset by positive growth in same unit revenue for the quarter. For
business units with a full period of operations for the three-month periods
ended June 30, 2002 and 2001, revenue increased $0.6 million, or 0.5%.
Total revenues decreased to $270.4 million for the six-month period ended June
30, 2002, from $292.7 million for the comparable period in 2001, a decrease of
$22.3 million, or 7.6%. The decrease in revenue attributable to divestitures was
$18.7 million for the six-month period ended June 30, 2002. For business units
with a full period of operations for the six-month periods ended June 30, 2002
and 2001, revenue decreased $3.6 million, or 1.3%.
Expenses
Operating expenses increased to $113.6 million for the three-month period ended
June 30, 2002, from $112.5 million for the comparable period in 2001, an
increase of $1.1 million, or 1.0%. Operating expenses decreased to $230.4
million for the six-month period ended June 30, 2002, from $233.7 million for
the comparable period in 2001, a decrease of $3.3 million, or 1.0%. As a
percentage of revenue, operating expenses for the three and six-month periods
ended June 30, 2002 were 89.4% and 85.2%, compared to 85.5% and 79.9%,
respectively for the comparable period. Operating expense as a percentage of
revenue increased due to higher levels of compensation carried through the first
quarter of 2002. During the second quarter of 2002, CBIZ initiated expense
reductions and incurred related expenses such as severance charges to help bring
the compensation expense back in line with revenue levels in future quarters.
Resulting from the expense reductions and continuing consolidation activities,
CBIZ incurred severance costs and restructuring costs of $1.2 million and $3.3
million for the three and six month periods ended June 30, 2002, compared to
costs of $0.5 million and $0.1 million for the comparable periods in 2001. CBIZ
expects to realize the full impact of these expense reductions in the third
quarter.
Corporate general and administrative expenses increased to $5.2 million for the
three-month period ended June 30, 2002, from $4.4 million for the comparable
period in 2001. Corporate general and administrative expenses increased to $10.0
million for the six-month period ended June 30, 2002, from $9.2 million for the
comparable period in 2001. Corporate general and administrative represented 4.1%
and 3.7% of total revenue for the three and six-month periods ended June 30,
2002, compared to 3.3% and 3.1% for the comparable periods in 2001,
respectively. The increase in corporate general and administrative cost was
primarily driven by an increase in legal costs of $1.0 million, due to the cost
to pursue cases concerning non-competition violations by former employees,
insurance coverage issues, and other cases in which CBIZ is involved.
Depreciation and amortization expense decreased to $5.1 million for the
three-month period ended June 30, 2002, from $10.4 million for the comparable
period in 2001, a decrease of $5.3 million, or 50.4%. Depreciation and
amortization expense decreased to $10.4 million for the six-month period ended
June 30, 2002, from $20.4 million for the comparable period in 2001, a decrease
of $10.0 million, or 49.4%. The decrease is primarily attributable to the
decrease in goodwill amortization of $5.4 million and $11.0 million for the
three and six-months ended June 30, 2002, respectively, resulting from the
adoption of SFAS No. 142, which accordingly ceased the amortization of goodwill
effective January 1, 2002. The decrease is offset by an increase in depreciation
and amortization expense related to capital expenditures of $0.2 million and
$0.9 million for the three and six-months ended June 30, 2002, respectively. The
increase in capital expenditures and deprecation is primarily driven by
consolidation activities and the growth of the medical management practice. As a
percentage of total revenues, depreciation and amortization
13
was 4.1% and 3.8% of total revenue for the three and six-month periods ended
June 30, 2002, compared to 7.9% and 7.0% for the comparable periods in 2001,
respectively.
Interest expense decreased to $0.7 million for the three-month period ended June
30, 2002, from $1.8 million for the comparable period in 2001, a decrease of
$1.1 million, or 64.7%. The decrease is the result of a both lower average
outstanding balances on the debt and a lower average interest rate in 2002. The
average debt balance was $47.1 million in the second quarter of 2002, compared
with an average debt balance of $89.3 million in the second quarter of 2001, and
the weighted average interest rate in the second quarter of 2002 was 5.2%,
compared to 7.8% in the second quarter of 2001. Interest expense decreased to
$1.5 million for the six-month period ended June 30, 2002, from $4.4 million for
the comparable period in 2001, a decrease of $2.9 million, or 66.5%. The
decrease is the result of a both lower average outstanding debt balances and a
lower average interest rate in 2002. The average debt balance was $50.5 million
for the first six months of 2002, compared with an average debt balance of
$101.5 million for the same period in 2001. The weighted average interest rate
for the first six months of 2002 was 5.5%, compared to 8.2% for the same period
in 2001.
Net gain on sale of operations was $0.1 million and $1.1 million for the three
and six-month periods ended June 30, 2002, and was related to the sale of one
non-core business unit in the second quarter of 2002, as well as the sale of six
non-core business units in the first quarter of 2002. Net gain (loss) on sale of
operations was $0.9 million and ($1.4) million for the three and six-month
periods ended June 30, 2001, and was related to the sale of three non-core
business units, and the closure of one additional non-core business unit in the
second quarter of 2001, and sale of three non-core business units in the first
quarter of 2001.
Other income, net decreased to $1.2 million for the three-month period ended
June 30, 2002, from $1.3 million for the comparable period in 2001, a decrease
of $0.1 million, or 9.3%. Other income, net decreased to $1.7 million for the
six-month period ended June 30, 2002, from $2.4 million for the comparable
period in 2001, a decrease of $0.7 million, or 29.7%. Other income, net is
comprised primarily of interest income earned at CBIZ's payroll business, gains
and losses on the sale of assets, charges for legal reserves and settlements,
and miscellaneous income, such as contingent royalties from previous
divestitures. The decrease in other income is primarily related to the decrease
in interest income of $0.4 million and $1.0 million for the three and six months
ended June 30, 2002, due to lower interest rates in 2002.
CBIZ recorded income taxes from continuing operations of $1.6 million and $9.0
million for the three and six-month periods ended June 30, 2002, compared to
$2.6 million and $14.6 million for the comparables period in 2001. The effective
tax rate was 42.4% and 43.0% for the three and six-month periods ended June 30,
2002, compared to 55.8% and 56.4% for the comparable periods in 2001. Income
taxes are provided based on CBIZ's anticipated annual effective rate. 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.
For the three and six-months ended June 30, 2002, the effective tax rate is
higher than the statutory federal and state tax rates of approximately 40% due
to permanent differences, such as the write-down of non-deductible goodwill upon
disposition of businesses.
RESULTS OF OPERATIONS -- DISCONTINUED OPERATIONS
- ------------------------------------------------
During the first six months of 2002, CBIZ adopted formal plans to close two
small business units and completed the sale of a third in our Business Solutions
segment, which were no longer part of CBIZ's strategic long-term growth
objectives. The business units were reported as discontinued operations and the
net assets and liabilities and results of operations are reported separately in
the unaudited condensed consolidated financial statements. Based on the
estimated cost of closure, CBIZ recorded a loss on disposal from discontinued
operations, net of tax, of $0.9 million and $1.2 million for the three and
six-months ended June 30, 2002. Revenues from the discontinued operations for
the three and six-month periods ended June 30, 2002 were $0.3 million and $1.1
million respectively, as compared to $1.1 million and $2.4 million for 2001.
FINANCIAL CONDITION
- -------------------
Total assets decreased to $444.4 million at June 30, 2002, from $523.4 million
at December 31, 2001, primarily attributable to the decrease in goodwill.
Goodwill decreased by $91.7 million for the six-months ended June 30, 2002,
primarily due the $88.6 million impairment charge (pretax) recorded upon the
adoption of SFAS No. 142. Total liabilities decreased approximately $10.4
million, primarily due to the decrease in bank debt of $22.0 million, offset by
the increase in client obligations of $9.1 million. Total stockholders' equity
decreased approximately $68.6 million,
14
primarily due to the goodwill impairment charge taken under the adoption of SFAS
No. 142, offset by net income from continuing operations for the first six
months of 2002 of $12.0 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents increased $0.6 million to $4.9 million at June 30,
2002, from $4.3 million at December 31, 2001. Net cash provided by continuing
operating activities for the six months ended June, 2002 was $24.7 million, as
compared to $30.3 million in 2001, a decrease of $5.6 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 $2.0 million during the six months ended
June 30, 2002, consisted primarily of proceeds from the disposition of six
businesses for $3.6 million, offset by cash used to fund capital expenditures of
$6.3 million. Capital expenditures consisted of leasehold improvements and
equipment in connection with the consolidation of offices, growth in the medical
billing practice, and equipment purchases in relation to normal replacement.
Cash provided by investing activities of $4.5 million during the six months
ended June 30, 2001, consisted primarily of proceeds from the disposition of
nine businesses for $11.8 million, offset by cash used for contingent
consideration of business acquired ("earn outs") and capital expenditures.
Capital expenditures of $6.0 million consisted of leasehold improvements and
equipment in connection with the consolidation of certain offices and equipment
purchases in relation to normal replacement.
During the six months ended June 30, 2002, cash used in financing activities
consisted of a net reduction in the credit facility of $22.0 million and net
payments of $0.6 million used toward the reduction of notes payable and
capitalized leases. During the last twelve months, CBIZ reduced bank debt by
$43.8 million, from $76.8 million at June 30, 2001 to $33.0 million at June 30,
2002.
During the six months ended June 30, 2001, cash used in financing activities
consisted of a net reduction in the credit facility of $40.7 million and net
payments of $1.3 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 $33.0 million was outstanding at June
30, 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 June 30, 2002, CBIZ had $33.0 million outstanding under its credit facility.
Management believes that the available funds from the credit facility, along
with cash generated from operations, will be sufficient to meet its liquidity
needs in the foreseeable future. Management also expects to continue to further
reduce the outstanding balance on the credit facility with cash generated from
operations.
INTEREST RATE RISK MANAGEMENT
- -----------------------------
CBIZ entered into an interest rate swap agreement in the third quarter of 2001
to reduce the impact of potential rate increases on variable rate debt through
its credit facility. The interest rate swap has a notional amount of $25
million, a fixed LIBOR rate of 3.58%, and a maturity date of August 2003. CBIZ
accounts for the interest rate swap as a cash flow hedge, whereby the fair value
of the interest rate swap is reflected as an asset or liability in the
accompanying consolidated balance sheet. The interest rate swap (hedging
instrument) matches the notional amount, interest rate index and re-pricing
dates as those that exist under the variable rate debt through its credit
facility (hedged item). When the interest rate index is below the fixed rate
LIBOR, the change in fair value of the instrument represents a change in
intrinsic value, which is an effective hedge. This portion of change in value
will be recorded as other
15
comprehensive income (loss). For the six months ended June 30, 2002, the change
in fair value resulted in a loss of approximately $0.1 million, which is
recorded as other comprehensive income (loss).
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 collectability 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.
VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
The preparation of condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Specifically, management must make
estimates of the collectability of our accounts receivable, 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
16
the adequacy of the allowance for doubtful accounts and the collectibility of
notes receivable. Significant management judgments and estimates must be made
and used in connection with establishing the allowance for doubtful accounts in
any accounting period. Material differences may result if management made
different judgments or utilized different estimates. Our accounts receivable
balance was $118.0 million, net of allowance for doubtful accounts of $12.3
million, and our notes receivable balance was $10.2 million as of June 30, 2002.
VALUATION OF GOODWILL
Effective January 1, 2002, CBIZ adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," and
accordingly, ceased amortization of our remaining goodwill balance. During the
second quarter of 2002, CBIZ completed the process of evaluating our goodwill
for impairment using the new fair value impairment guidelines of SFAS 142. This
change to a new method of accounting for goodwill resulted in a non-cash
impairment charge of $88.6 million on a pretax basis, which was recorded as a
cumulative effect of a change in accounting principle. At June 30, 2002, CBIZ
had approximately $155.8 million of goodwill associated with prior acquisitions.
VALUATION OF INVESTMENTS
CBIZ has certain investments in privately held companies that are currently in
their start-up or development stages and are included in "other assets" in the
accompanying condensed consolidated balance sheets. These investments are
inherently risky as the market for the technologies or products they have under
development are typically in the early stages. The value of these investments is
influenced by many factors, including the operating effectiveness of these
companies, the overall health of the companies' industries, the strength of the
private equity markets and general market conditions. Although the market value
of these investments is not readily determinable, management believes their
current fair values approximate their carrying values. In light of the
circumstances noted above, particularly with respect to the current economic
environment, it is possible that the fair value of these investments could
decline in future periods.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as liabilities
when it is probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Disclosure is required when there is a reasonable
possibility that the ultimate loss will exceed the recorded provision.
Contingent liabilities are often resolved over long time periods. Estimating
probable losses requires analysis that often depends on judgment about potential
actions by third parties.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the consolidated financial statements. Those policies are
described in Note 1 to the consolidated financial statements contained in our
annual report on Form 10-K for the year ended December 31, 2001.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In July 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002, and is not expected to have a significant
impact on our financial position and results of operations.
FORWARD-LOOKING STATEMENTS
- --------------------------
Statements included in the Form 10-Q, which are not historical in nature, are
forward-looking statements made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
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
17
growth; CBIZ's dependence on the services of its CEO and other key employees;
competitive pricing pressures; general business and economic conditions; and
changes in governmental regulation and tax laws affecting its operations. A more
detailed description of risks and uncertainties may be found in CBIZ's Annual
Report on Form 10-K. All forward-looking statements in this Form 10-Q are
expressly qualified by the Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
QUANTITATIVE INFORMATION ABOUT MARKET RISK.
CBIZ's floating rate debt under its credit facility exposes the Company to
interest rate risk. A change in the Federal Funds Rate, or the Reference Rate
set by the Bank of America (San Francisco), would affect the rate at which CBIZ
could borrow funds under its credit facility. If market interest rates were to
increase or decrease immediately and uniformly by 100 basis points from the
levels at June 30, 2002, interest expense would increase or decrease by $0.3
million annually. CBIZ has entered into an interest rate swap to minimize the
potential impact of future increases in interest rates. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Risk Management," for a further discussion of this
financial instrument.
CBIZ does not engage in trading market risk sensitive instruments. Except for
the interest rate swap discussed above, CBIZ does not purchase instruments,
hedges, or "other than trading" instruments that are likely to expose CBIZ to
market risk, whether foreign currency exchange, commodity price or equity price
risk. CBIZ has not issued debt instruments, entered into forward or futures
contracts, or purchased options.
QUALITATIVE INFORMATION ABOUT MARKET RISK.
CBIZ's primary market risk exposure is that of interest rate risk. A change in
the Federal Funds Rate, or the reference rate set by the Bank of America (San
Francisco), would affect the rate at which CBIZ could borrow funds under its
credit facility. See "Quantitative Information about Market Risk" for a further
discussion on the potential impact of a change in interest rates.
PART II - OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At CBIZ's Annual Meeting of Shareholders held on May 17, 2002, the following
matters were submitted to a vote of stockholders:
1) The election of the following individuals to the Board of Directors to serve
until the 2005 Annual Meeting of Shareholders.
Authority Granted Authority Withheld
----------------- ------------------
Joseph S. DiMartino 75,044,111 3,081,494
Richard C. Rochon 74,884,523 3,241,082
2) The approval of the appointment of KPMG LLP as independent accountants for
fiscal year 2002.
Shares For Shares Against Abstained
---------- -------------- ---------
76,274,188 1,735,532 115,885
3) The approval for the adoption of Century Business Services, In. 2002 Stock
Incentive Plan to supersede the Century Business Services, Inc. 1996 Amended
and Restated Employee Stock Option Plan.
Shares For Shares Against Abstained
---------- -------------- ---------
42,508,878 7,986,365 860,825
18
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 June 30, 2002.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Business Services, Inc.
-------------------------------
(Registrant)
Date: August 14, 2002 By: /s/ Ware H. Grove
--------------- -----------------------------------
Ware H. Grove
Chief Financial Officer
19
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
EXHIBIT INDEX
-------------
Exhibit Number:
99.1 Sixth Amendment to the Amended and Restated Credit Agreement ......... 21
99.2 Century Business Services, Inc. 2002 Stock Incentive Plan ............ 39
99.3 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 ....................................... 56
99.4 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 ...................................... 56
20