UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-25890
CENTURY BUSINESS SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2769024
- ------------------------------------ --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6480 Rockside Woods Boulevard South, Suite 330, Cleveland, Ohio 44131
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
-----------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding at
Class of Common Stock April 30, 2003
- --------------------- --------------
Par value $.01 per share 95,985,526
1
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations -
Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 5
Notes to the Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
Item 3. Quantitative and Qualitative Information about Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 19
Signature 19
Certifications 20-21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 3,287 $ 6,351
Restricted cash ...................................... 14,798 16,980
Accounts receivable, net ............................. 127,727 102,982
Notes receivable - current ........................... 1,952 2,029
Income taxes recoverable ............................. -- 4,957
Deferred income taxes ................................ 3,719 3,567
Other current assets ................................. 7,539 7,098
Assets of businesses held for sale ................... 9,028 9,566
--------- ---------
Current assets before funds held for clients ...... 168,050 153,530
Funds held for clients ............................... 35,975 49,217
--------- ---------
Total current assets ............................. 204,025 202,747
Property and equipment, net ............................ 44,247 44,600
Notes receivable - non-current ......................... 6,308 7,585
Deferred income taxes - non-current .................... 10,515 10,580
Goodwill and other intangible assets, net .............. 165,159 163,706
Other assets ........................................... 3,575 3,893
--------- ---------
Total assets ..................................... $ 433,829 $ 433,111
========= =========
LIABILITIES
Current liabilities:
Accounts payable .................................... $ 21,994 $ 22,548
Income taxes payable ................................ 4,947 --
Other current liabilities ........................... 37,342 37,687
Liabilities of businesses held for sale ............. 6,006 6,905
--------- ---------
Current liabilities before client fund obligations 70,289 67,140
Client fund obligations ............................. 35,975 49,217
--------- ---------
Total current liabilities ....................... 106,264 116,357
Bank debt .............................................. 17,000 17,500
Other non-current liabilities .......................... 5,598 4,936
--------- ---------
Total liabilities ............................... 128,862 138,793
--------- ---------
STOCKHOLDERS' EQUITY
Common stock ........................................... 953 951
Additional paid-in capital ............................. 440,237 439,684
Accumulated deficit .................................... (134,753) (144,754)
Treasury stock ......................................... (1,308) (1,308)
Accumulated other comprehensive loss ................... (162) (255)
--------- ---------
Total stockholders' equity ...................... 304,967 294,318
Commitments and contingencies
--------- ---------
Total liabilities and stockholders' equity ...... $ 433,829 $ 433,111
========= =========
See the accompanying notes to the consolidated financial statements.
3
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31
-------------------------------
2003 2002
--------- ---------
Revenue ........................................................... $ 146,295 $ 142,204
Operating expenses ................................................ 118,061 115,394
--------- ---------
Gross margin ...................................................... 28,234 26,810
Corporate general and administrative .............................. 5,249 4,870
Depreciation and amortization ..................................... 4,297 4,931
--------- ---------
Operating income .................................................. 18,688 17,009
Other income (expense):
Interest expense .............................................. (323) (818)
Gain on divested operations, net .............................. -- 1,024
Other income (expense), net ................................... (538) 502
--------- ---------
Total other income (expense), net ........................ (861) 708
Income from continuing operations before income tax
expense ........................................................... 17,827 17,717
Income tax expense ................................................ 7,575 7,633
--------- ---------
Income from continuing operations ................................. 10,252 10,084
Loss from operations of discontinued operations, net of tax ....... (251) (440)
Loss on disposal of discontinued operations, net of tax ........... -- (344)
--------- ---------
Income before cumulative effect of change in accounting principle . 10,001 9,300
Cumulative effect of a change in accounting principle, net of
tax ............................................................... -- (80,007)
--------- ---------
Net income (loss) ................................................. $ 10,001 $ (70,707)
--------- ---------
Earnings (loss) per share:
Basic:
Continuing operations ........................................ $ 0.11 $ 0.10
Discontinued operations ...................................... (0.01) (0.01)
Cumulative effect of change in accounting principle .......... -- (0.84)
--------- ---------
Net income (loss) ............................................ $ 0.10 $ (0.75)
========= =========
Diluted:
Continuing operations ........................................ $ 0.11 $ 0.10
Discontinued operations ...................................... (0.01) (0.01)
Cumulative effect of change in accounting principle .......... -- (0.82)
--------- ---------
Net income (loss) ............................................ $ 0.10 $ (0.73)
========= =========
Weighted-average common shares outstanding:
Basic .......................................................... 95,087 94,880
========= =========
Diluted ........................................................ 96,956 97,112
========= =========
See the accompanying notes to the consolidated financial statements.
4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss) ........................................ $10,001 $(70,707)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Loss from discontinued operations ...................... 251 440
Loss on divestiture of discontinued operations ......... -- 344
Gain on divested operations .......................... -- (1,024)
Bad debt expense, net of recoveries .................... 1,176 1,475
Impairment of notes receivable ......................... 1,625 --
Cumulative effect of change in accounting principle .... -- 80,007
Depreciation and amortization .......................... 4,297 4,931
Deferred income taxes .................................. (87) (3,272)
Changes in assets and liabilities, net of acquisitions
and dispositions:
Restricted cash ........................................ 2,182 1,244
Accounts receivable, net ............................... (25,809) (16,449)
Other assets ........................................... (321) (4,547)
Accounts payable ....................................... (568) (225)
Income taxes ........................................... 10,039 14,415
Accrued expenses and other liabilities ................. (1,145) (4,623)
-------- --------
Net cash provided by continuing operations .................. $ 1,641 $ 2,009
Net cash provided by discontinued operations ................ 430 102
-------- --------
Net cash provided by operating activities ................... 2,071 2,111
-------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired and contingent
consideration .......................................... (795) --
Proceeds from divested operations ........................ -- 2,122
Additions to property and equipment, net ................. (3,235) (3,206)
Net (increase) decrease in notes receivable .............. (475) 519
-------- --------
Net cash provided by (used in) investing activities ......... (4,505) (565)
-------- --------
Cash flows from financing activities:
Proceeds from bank debt .................................. 46,850 7,100
Proceeds from notes payable and capitalized leases ....... 88 --
Payment of bank debt ..................................... (47,350) (12,100)
Payment of notes payable and capitalized leases .......... (251) (378)
Proceeds from exercise of stock options and warrants ..... 33 6
-------- --------
Net cash used in financing activities .................... (630) (5,372)
-------- --------
Net decrease in cash and cash equivalents ................... (3,064) (3,826)
Cash and cash equivalents at beginning of year .............. 6,351 4,340
-------- --------
Cash and cash equivalents at end of year .................... $ 3,287 $ 514
======== ========
See the accompanying notes to the consolidated financial statements.
5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2003 and December 31, 2002, and the
results of their operations and cash flows for the three-month periods
ended March 31, 2003 and 2002. The results of operations for such interim
periods are not necessarily indicative of the results for the full year.
The accompanying unaudited 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. For further
information, refer to the consolidated financial statements and footnotes
thereto included in CBIZ's annual report on Form 10-K for the year ended
December 31, 2002. Also, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of
critical accounting policies.
Use of Estimates
The preparation of financial statements in conformity with 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 2002 condensed
consolidated financial statements to conform to the 2003 presentation.
New Accounting Pronouncements
Effective January 1, 2003, CBIZ adopted Statement of Financial Accounting
Standards (SFAS) 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The standard requires companies to recognize costs
associated with exit or disposal activities when costs are incurred rather
than at the date of a commitment to an exit or disposal plan. The
implementation of SFAS 146 did not have a material impact on CBIZ's
results of operations, financial position or cash flows.
Effective January 1, 2003, CBIZ adopted SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosures," an amendment to
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. CBIZ
has elected not to voluntarily change to the fair value based method of
accounting for stock options, but has adopted the disclosure requirements.
See Note 7 for the applicable disclosures.
Effective January 1, 2003, CBIZ adopted Financial Interpretation 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others," which addresses
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. The
implementation of the accounting pronouncement did not have a material
impact on CBIZ's results of operations, financial position, or cash flows.
In January 2003, FASB issued Interpretation 46 (FIN 46), "Consolidation of
Variable Interest Entities." FIN 46 addresses the consolidation of
variable interest entities (VIEs) that have the characteristics of equity
investments at risk not sufficient to permit the entity to finance its
activities without additional financial support from other parties, or
VIEs in which the equity investor lacks essential characteristics of a
controlling financial interest. The consolidation requirements of FIN 46
apply immediately to VIE's created after January 31, 2003. The
consolidation requirements apply to entities existing prior to January 31,
2003 in the first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003 regardless of when the VIE was
established. CBIZ has adopted the disclosure provisions and expects to
adopt the consolidation requirements, if applicable, on July 1, 2003.
6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable balances were as follows (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Trade accounts receivable .......... $ 89,648 $ 82,694
Unbilled revenues .................. 49,629 29,123
--------- ---------
Total accounts receivable .......... 139,277 111,817
Less allowance for doubtful accounts (11,550) (8,835)
--------- ---------
Accounts receivable, net ........... $ 127,727 $ 102,982
========= =========
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of intangible assets, net are as follows (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
Goodwill, net of accumulated amortization ..... $ 157,084 $ 157,035
Intangibles:
Client lists ................................ 10,965 9,217
Other intangibles ........................... 527 484
--------- ---------
Total intangibles ...................... 11,493 9,701
Total goodwill and other intangibles assets ... 168,577 166,736
Less accumulated amortization ................. (3,418) (3,030)
--------- ---------
Total goodwill and other intangible assets, net $ 165,159 $ 163,706
========= =========
Client lists are amortized over a period not to exceed ten years. Other
intangibles, which consist primarily of non-compete agreements,
expirations, trademarks and website costs are amortized over periods
ranging from three to ten years.
4. BANK DEBT
Bank debt balances were as follows (in thousands, except percentages):
MARCH 31, DECEMBER 31,
2003 2002
---------- ----------
Bank debt:
Revolving credit facilities, effective rates of 3.31% to 5.58% .. $ 17,000 $ 17,500
========== ==========
Weighted average rates .......................................... 5.10% 5.80%
========== ==========
The bank agreement contains financial covenants that require CBIZ to meet
certain requirements with respect to (i) minimum tangible net worth;
(ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage
ratio. Limitations are also placed on CBIZ's ability to acquire as well as
divest operations. As of March 31, 2003, CBIZ was in compliance with its
covenants.
In the ordinary course of business, CBIZ provides letters of credit to
certain lessors in lieu of security deposits. Letters of credit under the
credit facility were $3.0 million and $2.0 million as of March 31, 2003
and December 31, 2002, respectively. Management does not expect any
material charges to result from these instruments because performance is
not expected to be required.
At March 31, 2003, based on the borrowing base calculation, CBIZ had
approximately $49.0 million of available funds under its credit facility.
Management believes that the carrying amount of bank debt recorded at
March 31, 2003 approximates its fair value.
7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
5. CONTINGENCIES
CBIZ is from time to time subject to claims and suits arising in the
ordinary course of business. CBIZ is involved in certain legal proceedings
as described in Part I, "Item 3 - Legal Proceedings" in our Annual Report
on Form 10-K for the year ended December 31, 2002. There have been no
significant developments in such claims or suits during the first quarter
of 2003, other than an adjustment recorded to certain legal reserves as
the result of a favorable judgment received in April of 2003. Reserve
adjustments are recorded in other income (expense), net. Although the
ultimate disposition of such proceedings is not presently determinable,
management does not believe that the ultimate resolution of these matters
will have a material adverse effect on the financial condition, results of
operations or cash flows of CBIZ.
6. CONSOLIDATION AND INTEGRATION CHARGES
The 1999 Plan -- During the fourth quarter of 1999, CBIZ's Board of
Directors approved a plan to consolidate several operations in
multi-office markets and integrate certain back-office functions into a
shared-services center. The plan included the consolidation of
approximately 60 locations, the elimination of more than 200 positions,
and the divestiture of four non-core businesses.
Other Plans -- Since adoption of the 1999 Plan, management has continued
to evaluate market areas in order to meet its strategy to deliver services
to clients conveniently, and to promote cross-serving between various
service groups. CBIZ has initiated consolidation activities in several
markets and has incurred expenses related to noncancellable lease
obligations, severance obligations, and expense-reduction initiatives.
During the first quarter of 2002, CBIZ initiated plans for the
consolidation of the Kansas City market which resulted in $1.7 million of
charges related to noncancellable lease obligations. During the first
quarter of 2003, there was no significant consolidation and integration
activity. In addition, management continues to evaluate and adjust certain
reserve estimates made on the non-cancellable lease obligations.
Consolidation and integration reserve balances as of December 31, 2002,
and activity during the three-month period ended March 31, 2003 was as
follows (in thousands):
LEASE CONSOLIDATIONS
------------------------------
1999 PLAN OTHER PLANS
--------- -----------
Reserve balance at December 31, 2002 ... $ 64 $ 3,705
Reserve estimate adjustments to income -- 89
Payments ............................. (44) (295)
------- -------
Reserve balance at March 31, 2003 ...... $ 20 $ 3,499
======= =======
Consolidation and integration charges incurred for the three months ended
March 31, 2003 and 2002, which are included in operation expenses in the
condensed consolidated statements of operations, were as follows (in
thousands):
2003 2002
------- -------
CONSOLIDATION AND INTEGRATION CHARGES NOT IN 1999 PLAN:
Severance expense .................................. $ 45 $ 40
Lease consolidation and abandonment ................ 302 2,066
Other consolidation charges ........................ (35) --
------- -------
Subtotal ....................................... 312 2,106
CONSOLIDATION AND INTEGRATION CHARGES FOR THE 1999 PLAN:
Adjustment to lease accrual ............................ -- (10)
------- -------
Total consolidation and integration charges ............ $ 312 $ 2,096
======= =======
8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
7. STOCK-BASED COMPENSATION
CBIZ accounts for the stock-based compensation plans under the intrinsic
value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost has been reflected in net income (loss), as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) and earnings (loss) per share
as if CBIZ had applied the fair value recognition provisions of SFAS 123
to stock-based employee compensation (in thousands, except per share
data).
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2002
---------- ----------
Net income (loss) as reported ......... $ 10,001 $ (70,707)
Fair value of stock-based compensation,
net of tax ......................... (802) (802)
---------- ----------
Pro forma net income (loss) ........... $ 9,199 $ (71,509)
========== ==========
Earnings (loss) per share:
Basic - as reported ............... $ 0.10 $ (0.75)
Basic - pro forma ................. $ 0.10 $ (0.75)
Diluted - as reported ............. $ 0.10 $ (0.73)
Diluted - pro forma ............... $ 0.10 $ (0.74)
The above results may not be representative of the effects on net income
for future years.
8. EARNINGS PER SHARE
CBIZ presents both basic and diluted earnings per share. The following
data shows the amounts used in computing earnings per share and the effect
on the weighted average number of dilutive potential common shares (in
thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
-------- --------
Numerator:
Net income (loss) ............... $ 10,001 $(70,707)
======== ========
Denominator:
Basic:
Weighted average common shares
Shares ....................... 95,087 94,880
Diluted:
Options ...................... 1,869 2,232
-------- --------
Total ..................... 96,956 97,112
======== ========
9. ACQUISITIONS
In January 2003, CBIZ completed the acquisition of a benefits and
insurance firm in Boca Raton, Florida. The aggregate purchase price of
this acquisition was approximately $1.2 million, comprised of $0.7 million
in cash and 177,000 shares of restricted common stock (estimated stock
value of $0.5 million at acquisition). The excess of purchase price over
fair value of net assets acquired was allocated to purchased client list,
and is being amortized over a ten-year period. The operating results of
this firm have been included in the accompanying condensed consolidated
financial statements since the date of acquisition.
9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - (CONTINUED)
10. DIVESTITURES
During the first quarter of 2003, there were no transactions related to
the sale of a business, commitment to sell a business, or classification
of a unit as a discontinued operation.
During the first quarter of 2002, CBIZ sold, closed or committed to sale,
eight businesses. The sale of these businesses was either initiated before
CBIZ adopted of SFAS No. 144 "Accounting for the Impairment of or the
Disposal of Long-Lived Assets", or did not meet the criteria for treatment
as a discontinued operation and were reported under gain on divested
operations from continuing operations. Of these eight operations, CBIZ
completed the sale or closing of five Accounting, Tax and Advisory (ATA)
operations, one Benefits and Insurance operation, and two National
Practices operations for an aggregate price of $5.7 million which included
$3.6 million in notes receivables. These divestitures resulted in a pretax
gain of $1.0 million.
11. SEGMENT REPORTING
CBIZ business units are aggregated into three operating practice groups:
Accounting, Tax and Advisory (ATA), Benefits and Insurance, and National
Practices. CBIZ MMP, which is CBIZ's medical practice management unit
within the National Practices Group, exceeded the quantitative threshold
of aggregation (10% of total revenues) as defined under SFAS No. 131,
"Disclosures About Segments of Enterprise and Related Information," in
2002, therefore requiring separate segment disclosure. In addition to the
four reportable segments disclosed, corporate and other is also reported
separately. Corporate and other includes certain operating expenses that
are not allocated to any individual unit or segment, such as insurance
costs, audit fees, consolidation and integration charges, and costs
related to other company-wide initiatives. Segment information for the
three-month periods ended March 31, 2003 and 2002 were as follows (in
thousands):
MARCH 31, 2003
------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
------------------------------------------------------------------------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------- --------- --------- --------- --------- ---------
Revenue ........................... $ 70,400 $ 39,881 $ 17,578 $ 18,436 $ -- $ 146,295
Operating expenses ................ 49,077 32,083 15,155 19,265 2,481 118,061
--------- --------- --------- --------- --------- ---------
Gross margin .................... 21,323 7,798 2,423 (829) (2,481) 28,234
Corporate general & administrative -- -- -- -- 5,249 5,249
Depreciation and amortization ..... 1,256 754 601 323 1,363 4,297
--------- --------- --------- --------- --------- ---------
Operating income (loss) ......... 20,067 7,044 1,822 (1,152) (9,093) 18,688
Other income (expense):
Interest expense ................ (13) (23) (1) (1) (285) (323)
Other income (expense), net ..... 78 52 (1) 222 (889) (538)
--------- --------- --------- --------- --------- ---------
Total other income (expense) .. 65 29 (2) 221 (1,174) (861)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes .... $ 20,132 $ 7,073 $ 1,820 $ (931) $ (10,267) $ 17,827
========= ========= ========= ========= ========= =========
10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
MARCH 31, 2002
------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
------------------------------------------------------------------------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------- --------- --------- --------- --------- ---------
Revenue ............................ $ 72,345 $ 35,859 $ 15,111 $ 18,889 $ -- $ 142,204
Operating expenses ................. 50,539 30,146 12,951 18,433 3,325 115,394
--------- --------- --------- --------- --------- ---------
Gross margin ..................... 21,806 5,713 2,160 456 (3,325) 26,810
Corporate general & administrative . -- -- -- -- 4,870 4,870
Depreciation and amortization ...... 1,062 971 436 380 2,082 4,931
--------- --------- --------- --------- --------- ---------
Operating income (loss) .......... 20,744 4,742 1,724 76 (10,277) 17,009
Other income (expense):
Interest expense ................. (14) (22) (2) (22) (758) (818)
Gain on divested operations, net . -- -- -- -- 1,024 1,024
Other income, net ................ 77 97 3 245 80 502
--------- --------- --------- --------- --------- ---------
Total other income (expense) ... 63 75 1 223 346 708
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes ..... $ 20,807 $ 4,817 $ 1,725 $ 299 $ (9,931) $ 17,717
========= ========= ========= ========= ========= =========
12. DISCONTINUED OPERATIONS
During 2002, CBIZ adopted formal business plans to sell or close five
business operations that were no longer part of CBIZ's strategic long-term
growth objectives. These business operations are reported as discontinued
operations and the net assets and liabilities and results of operations
are reported separately in the condensed consolidated financial
statements. One operation was closed during the first quarter of 2002 for
a loss on disposal of $0.3 million and three additional operations were
subsequently closed during the remainder of the year 2002. One operation
still remains available for sale as of March 31, 2003.
Revenue from the discontinued operations for the three months ended March
31, 2003 and 2002 were $0.6 million and $2.0 million, respectively.
The assets and liabilities of the business units classified as
discontinued operations consisted of the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
------ ------
Accounts receivable, net ............. $4,833 $5,499
Property and equipment, net .......... 495 508
Deferred tax asset, net .............. 3,195 3,554
Other assets ......................... 505 5
------ ------
Assets of discontinued operations .... $9,028 $9,566
====== ======
Accounts payable ..................... $ 259 $ 425
Accrued expenses ..................... 5,747 6,480
------ ------
Liabilities of discontinued operations $6,006 $6,905
====== ======
13. SUBSEQUENT EVENTS
In May of 2003, CBIZ completed the acquisition of an accounting, tax and
advisory firm located in Huntington Beach, California. The aggregate
purchase price of this acquisition was approximately $2.1 million in cash,
of which $0.7 million was paid at closing, and $1.4 million of which is
contingent on the unit meeting certain future revenue targets.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding of CBIZ's
financial position and results of operations for the three months ended March
31, 2003 and 2002.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
Operating Practice Groups
CBIZ currently delivers products and services through three practice groups. A
brief description of these groups' operating results and factors affecting their
businesses is provided below.
Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory (ATA)
group contributed approximately $70.4 million and $72.3 million of revenue, or
approximately 48% and 51% of CBIZ's total revenue for the quarter ended March
31, 2003 and 2002, respectively. The decrease in revenue attributable to
divestitures completed during or subsequent to the first quarter 2002 was $0.8
million. For ATA businesses with a full period of operations for the three
months ended March 31, 2003 and 2002, revenue decreased $1.1 million, or 1.6%.
The decrease in same-unit revenue was due to weak economic conditions and
unfavorable weather conditions experienced on the East Coast and Colorado which
resulted in several short-term office closings and a reduction in chargeable
hours during the first quarter of 2003. The ATA group reported consistent gross
margins of 30% for the three months ended March 31, 2003 and 2002.
Benefits and Insurance Services. The Benefits and Insurance group contributed
approximately $39.9 million and $35.9 million of revenue, or approximately 27%
and 25% of CBIZ's total revenue for the quarter ended March 31, 2003 and 2002,
respectively. The increase in revenue is attributable to same unit revenue
growth as well as $2.1 million of revenue related to acquisitions completed
subsequent to the first quarter of 2002. For Benefits and Insurance businesses
with a full period of operations for the three-months ended March 31, 2003 and
2002, same-unit revenue increased $1.9 million, or 5.2%. Same unit revenue
growth was attributable to (i) favorable market conditions resulting in higher
premiums and therefore higher commission revenue, (ii) early receipt of
commission bonus payments based on carrier incentives typically received during
the first six months of the year and, (iii) several large cases closed during
the first quarter. Gross margin for the Benefits and Insurance group for the
three months ended March 31, 2003 was 20% as compared to 16% for the
three-months ended March 31, 2002.
National Practices Services. The National Practices group contributed
approximately $36.0 million and $34.0 million of revenue, or approximately 25%
and 24% of CBIZ's total revenue for the quarter ended March 31, 2003 and 2002,
respectively. Included in the results of the National Practices group are those
of CBIZ Medical Management Professionals (CBIZ MMP), CBIZ's medical practice
management unit, which contributed approximately $17.6 million and $15.1
million, or 12% and 11%, of CBIZ's total revenue for the quarter ended March 31,
2003 and 2002, respectively. CBIZ MMP's revenue growth of 16.4% is primarily
attributable to the addition of new clients and the expansion into new markets,
such as entrance into the western region of the United States during the later
part of 2002. The gross margin remained comparable at approximately 14% in 2002
and 2003.
The other units within the National Practices group, excluding CBIZ MMP,
contributed approximately $18.4 million and $18.9 million of revenue, or
approximately 13% of CBIZ's total revenue for the quarter ended March 31, 2003
and 2002, respectively. The decrease in revenue was experienced in CBIZ's
mergers and acquisition and valuation businesses offset by improvements in
health care consulting and information technology business.
Revenue
Total revenue for the three months ended March 31, 2003 was $146.3 million as
compared to $142.2 million for the three months ended March 31, 2002,
representing an increase of $4.1 million, or 2.9%. The increase in revenue
attributable to acquisitions completed subsequent to March 31, 2002 was $2.1
million, and was offset by a decrease in revenue of $0.8 million due to
divestitures completed subsequent to March 31, 2002. For business units with a
full period of operations for the three months ended March 31, 2003 and 2002,
revenue increased $2.8 million or 1.9%. A more comprehensive analysis of revenue
by each operating practice group is discussed above.
Expenses
Operating expenses increased to $118.1 million for the three-month period ended
March 31, 2003, from $115.4 million for the comparable period in 2002, an
increase of $2.7 million, or 2.3%. As a percentage of revenue, operating
expenses for the three-month period ended March 31, 2003 were 80.7%, compared to
81.1% for the comparable period. The primary components of operating expenses
are personnel costs and occupancy expense. Operating expenses in 2002 were
impacted by consolidation and integration charges of $2.1 million, primarily
12
related to the planned Kansas City consolidation. Excluding consolidation and
integration charges, operating expenses were $117.5 million, or 80.4% as a
percentage of revenue, for the three-month period ended March 31, 2003, compared
to $113.3 million, or 79.7% as a percentage of revenue, for the comparable
period in 2002. Operating expenses increased primarily due to increased
compensation expense of $4.4 million related to (i) additional hires to CBIZ's
medical practice management unit to support its growth, (ii) higher commission
expense in the Benefits and Insurance practice group related to the increased
revenues and (iii) the addition of several former Arthur Anderson, LLP
professionals to the ATA practice group, offset in part by staff reductions.
Corporate general and administrative expenses increased to $5.2 million for the
three-month period ended March 31, 2003, from $4.9 million for the comparable
period in 2002. Corporate general and administrative expenses represented 3.6%
of total revenues for the three-month period ended March 31, 2003, up from 3.4%
for the comparable period in 2002, respectively. The increase in corporate
general and administrative costs was primarily driven by an increase in
severance costs incurred related to reductions in corporate staff during the
first quarter of 2003.
Depreciation and amortization expense decreased to $4.3 million for the
three-month period ended March 31, 2003, from $4.9 million for the comparable
period in 2002, a decrease of $0.6 million, or 12.9%. The decrease is
attributable to asset retirements, fully depreciated assets, and the shift from
purchasing computer-related items to leasing such items. These operating lease
costs are recorded as operating expenses, rather than capitalized and recorded
as depreciation. As a percentage of total revenues, depreciation and
amortization expense was 2.9% for the three-month period ended March 31, 2003,
compared to 3.5% for the comparable period in 2002.
Interest expense decreased to $0.3 million for the three-month period ended
March 31, 2003, from $0.8 million for the comparable period in 2002, a decrease
of $0.5 million, or 60.5%. The decrease is the result of a lower average
outstanding debt of $19.4 million during the first quarter of 2003, compared to
$53.5 million during the first quarter of 2002, and a lower average interest
rate of 5.6% during the first quarter of 2003, compared to 5.8% during the first
quarter of 2002.
Gain on divested operations, net was $1.0 million for the three-month period
ended March 31, 2002, and was related to the sale or closing of eight businesses
operations. See Note 10 to CBIZ's condensed consolidated financial statements
included herewith.
CBIZ reported other expense of $0.5 million for the three-month period ended
March 31, 2003, compared to other income of $0.5 million for the comparable
period in 2002, a decrease of $1.0 million. Other income (expense), net is
comprised primarily of interest income earned on the funds held for clients at
CBIZ's payroll business, gain and losses on sale of assets, charges for legal
reserves and settlements and miscellaneous income such as contingent royalties
from previous divestitures. The change is primarily related to a $1.6 million
impairment charge to notes receivable recorded in connection with the
divestiture of the hazardous waste operation in 1997, additional legal reserves
recorded in 2003, and an adjustment taken against a legal case previously
reserved, for which CBIZ received a favorable judgment.
CBIZ recorded income taxes from continuing operations of $7.6 million for each
of the three-month periods ended March 31, 2003 and 2002. The effective tax rate
decreased to 42.5% for the three-month period ended March 31, 2003, from 43.1%
for the comparable period in 2002. The effective tax rate for the three-months
ended March 31, 2002 and 2003, are generally in line with the statutory federal
and state tax rates.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
During 2002, CBIZ adopted formal plans to divest five non-core operations which
were no longer part of CBIZ's strategic long-term growth objectives. These
operations were classified as discontinued operations in connection with the
adoption of Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and the assets
and liabilities and results of operations are reported separately in the
condensed consolidated financial statements. One of these operations was closed
during the first quarter of 2002 with an additional three units subsequently
sold or closed as of December 31, 2002. One operation still remains available
for sale as of March 31, 2003, and the sale is expected to be completed by year
end. Based on the estimated cost of closure, CBIZ recorded a loss on disposal
from discontinued operations, net of tax, of $0.3 million for the three-months
ended March 31, 2002. Revenue associated with these five discontinued operations
for the three-months ended March 31, 2003 and 2002 was $0.6 million and $2.0
million, respectively. The loss from operations, net of tax, associated with
these divestitures for the three-months ended March 31, 2003 and 2002 was $0.3
million and $0.4 million, respectively.
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RESULTS OF OPERATIONS -- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, CBIZ adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually at the reporting unit level. SFAS 142 also requires
intangible assets with finite useful lives to be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." CBIZ
finalized the required transitional tests of goodwill during 2002, and recorded
an impairment charge of $88.6 million on a pre-tax basis. This non-cash charge
is reflected as a cumulative effect of a change in accounting principle, net of
tax benefit, of $80.0 million.
FINANCIAL CONDITION
As of March 31, 2003, total assets were $433.8 million, total liabilities were
$128.9 million, and shareholders equity was $305.0 million. Current assets of
$204.0 million exceeded current liabilities of $106.3 million by $97.7 million
at March 31, 2003.
Cash and cash equivalents decreased $3.1 million to $3.3 million at March 31,
2003, from $6.4 million at December 31, 2002, as cash provided by operating
activities was used primarily for capital expenditures and debt reduction.
Restricted cash was $14.8 million at March 31, 2003, a decrease of $2.2 million
from December 31, 2002. Restricted cash represents those funds held in
connection with CBIZ's NASD regulated operations and funds held in connection
with the pass through of insurance premiums to the carrier. Funds held for
clients were $36.0 million, which is directly offset by client fund obligations.
Cash, restricted cash and funds held for clients fluctuate during the year based
on the timing of cash receipts and related payments. Accounts receivable, net
were $127.7 million at March 31, 2003, an increase of $24.7 million from
December 31, 2002. The increase in receivables is attributed to the seasonal
increase in revenues, namely tax services generated by the ATA operating
practice group. Goodwill and other intangible assets, net, of $165.2 million at
March 31, 2003, increased $1.5 million from December 31, 2002. The increase in
other intangibles is primarily related to the acquisition completed during the
quarter ended March 31, 2003.
The accounts payable balance of $22.0 million at March 31, 2003 reflects amounts
due to suppliers and vendors. Client fund obligations of $36.0 million were
directly related to funds held for clients in the same amount as reflected in
current assets. Total other accrued liabilities increased $0.3 million, from
$42.6 million at December 31, 2002 to $42.9 million at March 31, 2003. There
were no significant changes in other accrued liabilities, which are primarily
comprised of accrued compensation, consolidation and integration reserves,
litigation reserves, notes payable and capitalized leases. CBIZ's bank debt
balance was $17.0 million at March 31, 2003, a reduction of $0.5 million from
December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
CBIZ's bank line of credit is a $73.0 million revolving credit facility with
Bank of America as the agent bank. The credit facility carries an option to
increase the total commitment to $80 million and allows for the allocation of
funds for strategic initiatives, including acquisitions and the repurchase of
CBIZ stock. CBIZ expects to use the facility for working capital, internal
growth initiatives, and its acquisition program. The facility has a three-year
term with an expiration date of September 2005.
At March 31, 2003, CBIZ had $17 million outstanding under its credit facility,
and based on the borrowing base calculation, had approximately $49.0 million of
available funds 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. CBIZ is currently in
compliance with all covenants under its credit facility.
14
SOURCES AND USES OF CASH
Net cash provided by operating activities was $2.1 million for each of the
three-month periods ended March 31, 2003 and 2002, and was the primary source of
funds used to reduce CBIZ's bank debt.
CBIZ's principal source of net operating cash is derived from the collection of
fees from professional services rendered to its clients and commissions earned
in the areas of accounting, tax, valuation and advisory services, benefits
consulting and administration services, insurance, human resources and payroll
solutions, capital advisory, retirement and wealth management services and
technology solutions.
Net cash used in investing activities during the quarter ended March 31, 2003 of
$4.5 million primarily consisted of $3.2 million used for capital expenditures,
$0.8 million used toward the acquisition of a benefits and insurance firm, and
$0.4 million provided to HarborView Partners, for which CBIZ has a joint
marketing arrangement to provide internal audit outsourced services. Capital
expenditures consisted of leasehold improvements and equipment in connection
with the consolidation of certain offices, IT capital to support the growth of
the medical practice management unit and equipment purchases in relation to
normal replacement.
Net cash used in financing activities was $0.6 million in 2003 compared to $5.4
million in 2002, a decrease in use of $4.8 million. Cash was primarily used to
reduce bank debt by $0.5 million in 2003, compared to a reduction of $5.0
million in 2002.
INTEREST RATE RISK MANAGEMENT
CBIZ entered into an interest rate swap agreement in the third quarter of 2001
to reduce the impact of potential rate increases on variable rate debt through
its credit facility. The interest rate swap was entered into with a notional
amount of $25 million, a fixed LIBOR rate of 3.58%, and a maturity date of
August 2003. During 2002, CBIZ continued to reduce its outstanding debt. Based
on our continued strong cash flow and debt reduction, combined with the interest
rate environment, CBIZ reduced the notional amount of the swap to $15 million at
the end of 2002, and further reduced the notional amount of the swap to $10
million during quarter ended March 31, 2003. CBIZ accounts for the interest rate
swap as a cash flow hedge, whereby the fair value of the interest rate swap is
reflected as an asset or liability in the accompanying consolidated balance
sheet. The interest rate swap (hedging instrument) matches the notional amount,
interest rate index and re-pricing dates as those that exist under the variable
rate debt through its credit facility (hedged item). When the interest rate
index is below the fixed rate LIBOR, the change in fair value of the instrument
represents a change in intrinsic value, which is an effective hedge. This
portion of change in value will be recorded as other comprehensive income
(loss). For the quarter ended March 31, 2003, the change in fair value resulted
in a loss of approximately $0.2 million, which is recorded as accumulated other
comprehensive loss in stockholders' equity.
CRITICAL ACCOUNTING POLICIES
The policies discussed below are considered by management to be critical to the
understanding of CBIZ's condensed consolidated financial statements because
their application places significant demand on management's judgment, with
financial reporting results relying on estimation about the effects of matters
that are inherently uncertain. Specific risks for these critical accounting
policies are described in the following paragraphs. For all of these policies,
management cautions that estimates may require adjustment if future events
develop differently than forecasted.
REVENUE RECOGNITION AND VALUATION OF UNBILLED REVENUES
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, which is in accordance with generally accepted accounting
principles and SEC Staff Accounting Bulletin No. 101. CBIZ offers a vast array
of products and outsourced business services to its clients. Those services are
delivered through three segments. A description of revenue recognition, as it
relates to those segments, is provided below:
ACCOUNTING, TAX AND ADVISORY SERVICES - Revenue consists primarily of fees for
accounting services, preparation of tax returns and consulting services.
Revenues are recorded in the period in which they are earned. CBIZ bills clients
based upon a predetermined agreed upon fixed fee or actual hours incurred on
client projects at
15
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. A
description of the revenue recognition, based on insurance product and billing
arrangement, is described below:
- - Commissions relating to brokerage and agency activities whereby CBIZ has
primary responsibility for the collection of premiums from insured's
(agency or indirect billing) are generally recognized as of the earlier of
the effective date of the insurance policy or the date billed to the
customer.
- - Commissions to be received directly from insurance companies (direct
billing) are generally recognized when the amounts are determined.
- - Life insurance commissions are generally recognized when the amounts are
determined.
- - Commission revenue is reported net of sub-broker commissions.
- - Contingent commissions are recognized at the earlier of notification or
cash collection.
- - Fee income is recognized as in the period earned, and may be based on
actual hours incurred on an hourly fee basis, fixed fee arrangements or
asset-based fees.
NATIONAL PRACTICES - The business units that comprise this division offer a
variety of services. A description of revenue recognition associated with the
primary services is provided below:
- - Mergers & Acquisitions and Capital Advisory - Revenue associated with
non-refundable retainers are recognized on a pro rata basis over the life
of the engagement. Revenue associated with success fee transactions are
recognized when the transaction is completed.
- - Technology Consulting - Revenue associated with hardware and software
sales are recognized upon delivery and acceptance of the product. Revenue
associated with installation and service agreements are recognized as
services are performed. Consulting revenue is recognized on an hourly or
per diem fee basis.
- - Valuation and Property Tax - Revenue associated with retainer contracts
are recognized on a pro rata basis over the life of the contract, which is
generally twelve months. Revenue associated with contingency arrangements
is recognized once written notification is received from an outside third
party (e.g., assessor in the case of a property tax engagement)
acknowledging that the contingency has been completed.
- - Medical Practice Management - Revenue is recognized when payments are
received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
The preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Specifically, management must make estimates of the
collectibility of our accounts receivable, including unbilled accounts
receivable, related to current period service revenue. Management analyzes
historical bad debts, client credit-worthiness, and current economic trends and
conditions when evaluating the adequacy of the allowance for doubtful accounts
and the collectibility of notes receivable. Significant management judgments and
estimates must be made and used in connection with establishing the allowance
for doubtful accounts in any accounting period. Material differences may result
if management made different judgments or utilized different estimates.
VALUATION OF GOODWILL
Effective January 1, 2002, CBIZ adopted the provisions of SFAS 142 and
accordingly ceased amortization of our
16
remaining goodwill balance. During 2002, CBIZ completed the process of
evaluating our goodwill for impairment using the new fair market impairment
guidelines of SFAS 142. This change to a new method of accounting for goodwill
resulted in a non-cash impairment charge of $88.6 million on a pretax basis
($80.0 million net of tax), which was recorded as a cumulative effect of a
change in accounting principle.
VALUATION OF INVESTMENTS
CBIZ has certain investments in privately held companies that are currently in
their start-up or development stages and are included in "other assets" in the
accompanying unaudited 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 as of March
31, 2003. In light of the circumstances noted above, particularly with respect
to the current economic environment, it is possible that the fair value of these
investments could decline in future periods, and further impairment could occur.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as liabilities
when it is probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Contingent liabilities are often resolved over
long time periods. Estimating probable losses requires analysis that often
depends on judgment about potential actions by third parties.
ESTIMATES OF INCENTIVE COMPENSATION COSTS AND EFFECTIVE INCOME TAX RATES
Incentive compensation costs and income tax expense are two significant expense
categories that are highly dependent upon management estimates and judgments,
particularly at each interim reporting date. In arriving at the amount of
expense to recognize, management believes it makes reasonable estimates and
judgments using all significant information available. Incentive compensation
costs are accrued on a monthly basis, and the ultimate determination is made
after our year-end results are finalized; thus, estimates are subject to change.
Circumstances that could cause our estimates of effective income tax rates to
change include the impact of information that subsequently became available as
we prepared our corporate income tax returns; the level of actual pre-tax
income; revisions to tax positions taken as a result of further analysis and
consultation; and changes mandated as a result of audits by taxing authorities.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above are nevertheless important to
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, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation 46 (FIN 46), "Consolidation of
Variable Interest Entities." FIN 46 addresses the consolidation of variable
interest entities (VIEs) that have the characteristics of equity investments at
risk not sufficient to permit the entity to finance its activities without
additional financial support from other parties, or VIEs in which the equity
investor lacks essential characteristics of a controlling financial interest.
The consolidation requirements of FIN 46 apply immediately to VIE's created
after January 31, 2003. The consolidation requirements apply to entities
existing prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply to
all financial statements issued after January 31, 2003 regardless of when the
VIE was established. CBIZ has adopted the disclosure provisions and expects to
adopt the consolidation requirements, if applicable, on July 1, 2003.
CBIZ is continuing to evaluate the impact of FIN 46, but does not believe that
the consolidation provisions of FIN 46 will have a material impact on the
consolidated financial statements.
17
FORWARD-LOOKING STATEMENTS
This 10-Q Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this 10-Q Report, including without limitation, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding CBIZ's financial position, business strategy and plans and objectives
for future performance are forward-looking statements. Forward-looking
statements are commonly identified by the use of such terms and phrases as
"intends," "believes," "estimates," "expects," "projects," "anticipates,"
"foreseeable future," "seeks," and words or phases of similar import. Such
statements are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or assumptions materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Such risks and uncertainties include, but
are not limited to, CBIZ's ability to adequately manage its growth; CBIZ's
dependence on the services of its CEO and other key employees; competitive
pricing pressures; general business and economic conditions; and changes in
governmental regulation and tax laws affecting its operations. Consequently, no
forward-looking statement can be guaranteed. A more detailed description of
risks and uncertainties may be found in CBIZ's Annual Report on Form 10-K. CBIZ
undertakes no obligation to publicly update forward-looking statements, whether
as a result of new information, future events or otherwise. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Quantitative Information About Market Risk. CBIZ's floating rate debt under its
credit facility exposes the Company to interest rate risk. A change in the
Federal Funds Rate, or the Reference Rate set by the Bank of America (San
Francisco), would affect the rate at which CBIZ could borrow funds under its
credit facility. If market interest rates were to increase or decrease
immediately and uniformly by 100 basis points from the levels at March 31, 2003,
interest expense would increase or decrease by $0.2 million annually. CBIZ has
entered into an interest rate swap to minimize the potential impact of future
increases in interest rates. See Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Interest Rate Risk
Management," for a further discussion of this financial instrument.
CBIZ does not engage in trading market risk sensitive instruments. Except for
the interest rate swap discussed above, CBIZ does not purchase instruments,
hedges, or "other than trading" instruments that are likely to expose CBIZ to
market risk, whether foreign currency exchange, commodity price or equity price
risk. CBIZ has not issued debt instruments, entered into forward or futures
contracts or purchased options.
Qualitative Information About Market Risk. CBIZ's primary market risk exposure
is that of interest rate risk. A change in the Federal Funds Rate, or the
reference rate set by the Bank of America (San Francisco), would affect the rate
at which CBIZ could borrow funds under its credit facility. See "Quantitative
Information about Market Risk" for a further discussion on the potential impact
of a change in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer have evaluated the
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as of a date within 90 days before the filing date of this
quarterly report. Based on this evaluation they concluded that the disclosure
controls and procedures effectively ensure that information required to be
disclosed in our filings and submissions under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation of the internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.2 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the three
months ended March 31, 2003.
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, 2003 By: /s/ WARE H. GROVE
------------ -------------------------------
Ware H. Grove
Chief Financial Officer
19
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Steven L. Gerard, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century
Business Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ Steven L. Gerard
------------ --------------------------------
Steven L. Gerard
Chief Executive Officer
20
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Ware H. Grove, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century
Business Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ Ware H. Grove
------------ -----------------------------
Ware H. Grove
Chief Financial Officer
21