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 SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-25890
CENTURY BUSINESS SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2769024
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (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 October 31, 2003
--------------------- -------------------
Par value $.01 per share 86,266,856
1
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations --
Three and Nine Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2003 and 2002 5
Notes to the Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-24
Item 3. Quantitative and Qualitative Information about Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 24-25
Signature 25
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 4,422 $ 6,351
Restricted cash.................................................. 12,830 16,980
Accounts receivable, net......................................... 112,271 102,196
Notes receivable - current....................................... 334 2,029
Income taxes recoverable......................................... - 4,957
Deferred income taxes............................................ 3,669 3,567
Other current assets............................................. 7,303 7,026
Assets of businesses held for sale............................... 13,708 14,702
--------------------- ---------------------
Current assets before funds held for clients................. 154,537 157,808
Funds held for clients........................................... 30,895 49,217
--------------------- ---------------------
Total current assets......................................... 185,432 207,025
Property and equipment, net........................................ 40,618 44,418
Notes receivable - non-current..................................... 3,964 7,585
Deferred income taxes - non-current................................ 5,363 6,495
Goodwill and other intangible assets, net.......................... 167,246 163,706
Other assets....................................................... 3,218 3,882
--------------------- ---------------------
Total assets................................................. $ 405,841 $ 433,111
===================== =====================
LIABILITIES
Current liabilities:
Accounts payable................................................ $ 23,570 $ 22,482
Income taxes payable............................................ 6,607 -
Other current liabilities....................................... 33,527 37,202
Liabilities of businesses held for sale......................... 6,574 7,456
--------------------- ---------------------
Current liabilities before client fund obligations.......... 70,278 67,140
Client fund obligations......................................... 30,895 49,217
--------------------- ---------------------
Total current liabilities................................... 101,173 116,357
Bank debt.......................................................... 23,000 17,500
Other non-current liabilities...................................... 6,504 4,936
--------------------- ---------------------
Total liabilities........................................... 130,677 138,793
--------------------- ---------------------
STOCKHOLDERS' EQUITY
Common stock....................................................... 955 951
Additional paid-in capital......................................... 440,938 439,684
Accumulated deficit................................................ (131,744) (144,754)
Treasury stock..................................................... (34,981) (1,308)
Accumulated other comprehensive loss............................... (4) (255)
--------------------- ---------------------
Total stockholders' equity.................................. 275,164 294,318
Commitments and contingencies
--------------------- ---------------------
Total liabilities and stockholders' equity.................. $ 405,841 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- --------------------------------
2003 2002 2003 2002
----------------- --------------- --------------- --------------
Revenue................................................. $ 119,488 $ 115,318 $ 390,109 $ 380,479
Operating expenses...................................... 109,596 106,982 338,355 332,382
----------------- --------------- --------------- --------------
Gross margin............................................ 9,892 8,336 51,754 48,097
Corporate general and administrative expense............ 4,567 4,835 14,589 14,864
Depreciation and amortization expense................... 4,117 5,417 12,725 15,303
----------------- --------------- --------------- --------------
Operating income (loss)................................. 1,208 (1,916) 24,440 17,930
Other income (expense):
Interest expense...................................... (234) (501) (854) (1,972)
Gain (loss) on sale of operations, net................ 207 (237) 1,991 873
Other income (expense), net........................... 31 (1,921) (662) (315)
----------------- --------------- --------------- --------------
Total other income (expense), net................ 4 (2,659) 475 (1,414)
Income (loss) from continuing operations before
income tax expense (benefit)......................... 1,212 (4,575) 24,915 16,516
Income tax expense (benefit)............................ 1,007 (506) 11,076 8,568
----------------- --------------- --------------- --------------
Income (loss) from continuing operations................ 205 (4,069) 13,839 7,948
Loss from operations of discontinued businesses,
net of tax........................................... (233) (134) (436) (479)
Loss on disposal of discontinued businesses, net of tax. (210) (1,905) (393) (3,141)
----------------- --------------- --------------- --------------
Income (loss) before cumulative effect of change in
accounting principle................................. (238) (6,108) 13,010 4,328
Cumulative effect of a change in accounting principle,
net of tax.......................................... - - - (80,007)
----------------- --------------- --------------- --------------
Net income (loss)....................................... $ (238) $ (6,108) $ 13,010 $ (75,679)
================= =============== =============== ==============
Earnings (loss) per share:
Basic:
Continuing operations.............................. $ - $ (0.04) $ 0.15 $ 0.08
Discontinued operations............................ - (0.02) (0.01) (0.04)
Cumulative effect of change in accounting principle - - - (0.84)
----------------- --------------- --------------- --------------
Net income (loss).................................. $ - $ (0.06) $ 0.14 $ (0.80)
================= =============== =============== ==============
Diluted:
Continuing operations.............................. $ - $ (0.04) $ 0.15 $ 0.08
Discontinued operations............................ - (0.02) (0.01) (0.04)
Cumulative effect of change in accounting principle - - - (0.82)
----------------- --------------- --------------- --------------
Net income (loss).................................. $ - $ (0.06) $ 0.14 $ (0.78)
================= =============== =============== ==============
Basic weighted average shares outstanding............... 86,228 95,109 92,118 95,000
================= =============== =============== ==============
Diluted weighted average shares outstanding............. 88,971 95,109 94,267 97,233
================= =============== =============== ==============
See the accompanying notes to the consolidated financial statements.
4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ 13,010 $ (75,679)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss from operations of discontinued businesses............ 436 479
Loss on disposal of discontinued businesses................ 393 3,141
Gain on sale of operations................................. (1,991) (873)
Bad debt expense, net of recoveries........................ 3,684 5,916
Impairment of notes receivable............................. 1,625 -
Cumulative effect of change in accounting principle........ - 80,007
Depreciation and amortization.............................. 12,725 15,303
Deferred income taxes...................................... 1,030 5,940
Changes in assets and liabilities, net of acquisitions and
dispositions:
Restricted cash............................................ 4,018 2,788
Accounts receivable, net................................... (14,221) (1,922)
Other assets............................................... (654) 1,606
Accounts payable........................................... 1,389 (1,081)
Income taxes............................................... 11,567 1,137
Accrued expenses and other liabilities..................... (3,043) (34)
--------------- -------------
Net cash provided by continuing operations...................... 29,968 36,728
Net cash provided by discontinued operations.................... 456 603
--------------- -------------
Net cash provided by operating activities....................... 30,424 37,331
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions including contingent consideration, net
of cash acquired.......................... (3,256) -
Proceeds from divested operations............................ 5,045 3,622
Additions to property and equipment, net..................... (7,670) (7,379)
Net decrease in notes receivable............................. 1,473 1,588
--------------- -------------
Net cash used in investing activities........................... (4,408) (2,169)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt...................................... 165,200 48,900
Proceeds from notes payable and capitalized leases........... 383 595
Payment of bank debt......................................... (159,700) (78,900)
Payment of notes payable and capitalized leases.............. (1,038) (811)
Payment for acquisition of treasury stock.................... (33,523) -
Proceeds from exercise of stock options and warrants......... 733 532
--------------- -------------
Net cash used in financing activities........................... (27,945) (29,684)
--------------- -------------
Net increase (decrease) in cash and cash equivalents............ (1,929) 5,478
Cash and cash equivalents at beginning of year.................. 6,351 4,340
--------------- -------------
Cash and cash equivalents at end of year........................ $ 4,422 $ 9,818
=============== =============
See the accompanying notes to the consolidated financial statements.
5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated interim financial statements
reflect all adjustments (consisting of only normal and recurring
adjustments) necessary to present fairly the financial position of Century
Business Services, Inc. and Subsidiaries (CBIZ) as of September 30, 2003
and December 31, 2002, and the results of their operations for the three
and nine months ended September 30, 2003 and 2002, and cash flows for the
nine months ended September 30, 2003 and 2002. The results of operations
for such interim periods are not necessarily indicative of the results for
the full year. The accompanying unaudited consolidated interim financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim
financial reporting and the instructions to Form 10-Q, and accordingly do
not include all disclosures required by GAAP. For further information,
refer to the consolidated financial statements and footnotes thereto
included in CBIZ's annual report on Form 10-K for the year ended December
31, 2002. Also, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of critical
accounting policies.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Certain reclassifications have been made
to the 2002 consolidated financial statements to conform to the 2003
presentation.
New Accounting Pronouncements
Effective January 1, 2003, CBIZ adopted Statement of Financial Accounting
Standards (SFAS) 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The standard requires companies to recognize costs
associated with exit or disposal activities when costs are incurred rather
than at the date of a commitment to an exit or disposal plan. The
implementation of SFAS 146 did not have a material impact on CBIZ's results
of operations, financial position or cash flows.
Effective January 1, 2003, CBIZ adopted SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosures," an amendment to
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. CBIZ
has elected not to voluntarily change to the fair value based method of
accounting for stock options, but has adopted the disclosure requirements.
See Note 7 for the applicable disclosures.
Effective January 1, 2003, CBIZ adopted Financial Interpretation 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others," which addresses
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. The
implementation of the accounting pronouncement did not have a material
impact on CBIZ's results of operations, financial position, or cash flows.
In January 2003, the Financial Accounting Standards Board (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. In October 2003, the FASB
issued FASB Staff Position FIN 46-6 which deferred the application of FIN
46 for public entities until the first interim period ending after December
15, 2003, for VIEs acquired before February 1, 2003. In addition to the
issuance of FIN 46-6, the FASB has also proposed significant changes
regarding the scope of FIN 46, clarification of certain provisions, and
added
6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
disclosures, for which the comment period ends December 1, 2003. CBIZ has
evaluated FIN 46 as of September 30, 2003 and does not believe it holds
any interest in VIEs that would require consolidation. However, CBIZ will
continue to evaluate the standard based on additional guidance and
potential changes provided by the FASB.
In January 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." The Statement will
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly, and will result in more
consistent reporting of contracts as either derivatives or hybrid
instruments. This Statement is effective for contracts entered into or
modified after June 30, 2003. The implementation of this accounting
pronouncement did not have an impact on CBIZ's results of operations,
financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement affects the accounting for three types of freestanding
financial instruments that could previously be accounted for as equity:
mandatorily redeemable shares; put options and forward purchase contracts;
and obligations that can be settled with shares. This Statement is
effective for all financial instruments entered into or modified after May
31, 2003 and otherwise is effective July 1, 2003. The implementation of
this accounting pronouncement did not have an impact on CBIZ's results of
operations, financial position, or cash flows.
2. ACCOUNTS RECEIVABLE
Accounts receivable balances were as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------------- --------------------
Trade accounts receivable............................... $ 84,690 $ 82,022
Unbilled revenues....................................... 37,420 28,943
--------------------- --------------------
Total accounts receivable.............................. 122,110 110,965
Less allowance for doubtful accounts.................... (9,839) (8,769)
--------------------- --------------------
Accounts receivable, net................................ $ 112,271 $ 102,196
===================== ====================
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of intangible assets, net were as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------------- --------------------
Goodwill.............................................. $ 157,647 $ 157,035
Intangibles:
Client lists........................................ 13,025 9,217
Other intangibles................................... 687 484
--------------------- --------------------
Total Intangibles.............................. 13,712 9,701
Total goodwill and other intangibles assets........... 171,359 166,736
Less accumulated amortization......................... (4,113) (3,030)
--------------------- --------------------
Total goodwill and other intangible assets, net....... $ 167,246 $ 163,706
===================== ====================
Client lists are amortized over periods not exceeding ten years. Other
intangibles, which consist primarily of non-compete agreements,
expirations, trademarks and website costs are amortized over periods
ranging from two to ten years.
7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. BANK DEBT
Bank debt balances were as follows (in thousands, except percentages):
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------------- -------------------
Bank debt:
Revolving credit facilities, effective rates of
3.09% to 6.63%................................. $ 23,000 $ 17,500
==================== ==================
Weighted average rates......................... 4.72% 5.60%
==================== ==================
The bank agreement contains financial covenants that require CBIZ to meet
certain requirements with respect to (i) minimum net worth; (ii) maximum
leverage ratio; and (iii) a minimum fixed charge coverage ratio.
Limitations are also placed on CBIZ's ability to acquire, as well as to
divest operations. As of September 30, 2003, CBIZ was in compliance with
its covenants.
In the ordinary course of business, CBIZ provides letters of credit to
certain lessors in lieu of security deposits. Letters of credit under the
credit facility were $4.2 million and $1.9 million as of September 30, 2003
and December 31, 2002, respectively. Management does not expect any
material charges to result from these instruments because performance is
not expected to be required.
At September 30, 2003, based on the borrowing base calculation, CBIZ had
approximately $33.8 million of available funds under its credit facility.
Effective June 6, 2003, CBIZ completed an amendment to its credit facility
with its lenders. The amendment was completed for purposes of increasing
restricted payments to allow CBIZ to repurchase up to $52.5 million of
capital stock through December 31, 2003, in addition to the current
provision permitting the purchase of stock for up to 50% of trailing twelve
months net income. In conjunction with the amendment to allow for increased
repurchase of capital stock, the following changes were made to the credit
facility: (i) the minimum tangible net worth requirement was revised to a
minimum net worth test with a beginning base of $260 million, and (ii) the
borrowing base tied to levels of accounts receivable and WIP was revised to
permit an over-advance of $5 million to the total borrowing base for up to
10 consecutive business days during each month through December 31, 2003.
5. CONTINGENCIES
CBIZ is from time to time subject to claims and suits arising in the
ordinary course of business. CBIZ is involved in certain legal proceedings
as described in Part I, "Item 3 - Legal Proceedings" in our Annual Report
on Form 10-K for the year ended December 31, 2002. There have been no
significant developments in such claims or suits during the first nine
months of 2003, other than an adjustment recorded to certain legal reserves
as a 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 nine months of 2002, CBIZ initiated plans for the
consolidation of the Kansas City market which resulted in $1.7 million of
charges related to noncancellable lease obligations. During the first nine
months of 2003, CBIZ completed plans to consolidate two accounting firms in
the Orange county market which resulted in $0.2 million of charges related
to the termination of a future lease obligation. Management continually
evaluates and adjusts certain reserve estimates for noncancellable lease
obligations based on changes in market conditions and sublease
arrangements.
8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidation and integration reserve balances as of December 31, 2002, and
activity during the nine-month period ended September 30, 2003 was as
follows (in thousands):
LEASE CONSOLIDATIONS
-------------------------------
1999 PLAN OTHER PLANS
------------- --------------
Reserve balance at December 31, 2002................................. $ 64 $ 3,705
Reserve estimate adjustments to expense............................ 20 393
Payments........................................................... (78) (1,016)
------------- --------------
Reserve balance at September 30, 2003................................ $ 6 $ 3,082
============= ==============
Consolidation and integration charges incurred for the three and nine
months ended September 30, 2003 and 2002, which are included in operating
expenses in the consolidated statements of operations, were as follows (in
thousands):
-------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
------------- --------------
CONSOLIDATION AND INTEGRATION CHARGES NOT IN 1999 PLAN:
Severance expense..................................................... $ (9) $ 4
Lease consolidation and abandonment................................... 493 371
Other consolidation charges........................................... 412 117
------------- --------------
Total consolidation and integration charges............................... $ 896 $ 492
============= ==============
-------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
------------- --------------
CONSOLIDATION AND INTEGRATION CHARGES NOT IN 1999 PLAN:
Severance expense.................................................. $ 85 $ 33
Lease consolidation and abandonment................................ 1,079 2,799
Other consolidation charges........................................ 387 449
------------- --------------
Subtotal....................................................... 1,551 3,281
CONSOLIDATION AND INTEGRATION CHARGES FOR THE 1999 PLAN:
Adjustment to lease accrual............................................ 20 80
------------- --------------
Total consolidation and integration charges............................ $ 1,571 $ 3,361
============= ==============
7. STOCK-BASED COMPENSATION
CBIZ accounts for the stock-based compensation plans under the intrinsic
value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost has been reflected in net income (loss), as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) and earnings (loss) per share
as if CBIZ had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share data).
9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -------------------------
2003 2002 2003 2002
------------ ---------- ---------- ----------
Net income (loss) as reported................ $ (238) $ (6,108) $ 13,010 $ (75,679)
Fair value of stock-based compensation, net
of tax....................................... 816 905 2,435 2,612
------------ ---------- ---------- ----------
Pro forma net income (loss).................. $ (1,054) $ (7,013) $ 10,575 $ (78,291)
============ ========== ========== ==========
Earnings (loss) per share:
Basic -- as reported...................... $ - $ (0.06) $ 0.14 $ (0.80)
Basic -- pro forma........................ $ (0.01) $ (0.07) $ 0.11 $ (0.82)
Diluted -- as reported.................... $ - $ (0.06) $ 0.14 $ (0.78)
Diluted -- pro forma...................... $ (0.01) $ (0.07) $ 0.11 $ (0.81)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- ------------------------------------
2003 2002 (A) 2003 2002
------------------ --------------- --------------- ----------------
NUMERATOR:
Net income (loss)...................... $ (238) $ (6,108) $ 13,010 $ (75,679)
DENOMINATOR:
BASIC
Weighted average common
shares......................... 86,228 95,109 92,118 95,000
------------------ --------------- --------------- ----------------
DILUTED
Options......................... 2,743 - 2,149 2,233
------------------ --------------- --------------- ----------------
Total.................................. 88,971 95,109 94,267 97,233
================== =============== =============== ================
(a) The effect of the incremental shares from options of 1,829 for the
three months ended September 30, 2002 have been excluded from diluted
weighted average shares, as the net loss from continuing operations
for the period would cause the incremental shares to be anti-dilutive.
9. ACQUISITIONS
During the nine months ended September 30, 2003, CBIZ completed the
acquisition of benefits and insurance firms in Boca Raton, Florida and Salt
Lake City, Utah, as well as Accounting Tax & Advisory firms in Orange
County, California and Stamford, Connecticut. In addition to the
acquisitions of these businesses, CBIZ purchased the client lists of three
benefits agencies. The aggregate purchase price of these acquisitions and
client lists was approximately $10.8 million, comprised of $2.6 million in
cash and 177,000 shares of restricted common stock (estimated stock value
of $0.3 million at acquisition) paid at closing, $2.1 million of notes
contributed, and up to an additional $5.8 million payable in cash which is
contingent on the businesses meeting certain future revenue targets. The
excess of purchase price over fair value of net assets acquired was
allocated to the purchased client lists, which are being amortized periods
not exceeding ten years, to certain non-compete agreements, which are being
amortized over
10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
two years to five years, and to goodwill. The operating results of these
firms have been included in the accompanying consolidated financial
statements since the dates of acquisition.
10. DIVESTITURES
During the first quarter of 2003, there were no transactions related to the
sale of a business, commitment to sell a business, or classification of a
unit as a discontinued operation. During the second quarter of 2003, CBIZ
sold Health Administrative Services (HAS), with offices in Dallas and
Houston, Texas, and a small 401(k) recordkeeping business in Denver,
Colorado. CBIZ completed the sale of these two businesses for an aggregate
price of $4.2 million in cash, resulting in a pretax gain of $1.8 million.
During the third quarter of 2003, CBIZ sold two client lists and related
assets within the Accounting, Tax and Advisory (ATA) practice group for an
aggregate price of $0.9 million in cash and stock resulting in a pretax
gain of $0.2 million.
During the first quarter of 2002, CBIZ sold, closed or committed to sale,
eight businesses. Of these eight operations, CBIZ completed the sale or
closing of five ATA operations, one Benefits and Insurance operation, and
two National Practices operations for an aggregate price of $5.7 million
which included $3.6 million in notes receivable. These divestitures
resulted in a pretax gain of $1.1 million. During the second quarter of
2002, CBIZ completed the sale of one non-core business operation for an
aggregate price of $1.2 million, resulting in a pretax gain of $0.1
million. During the third quarter of 2002, CBIZ elected to close one
non-core business operation which resulted in a pretax loss of $0.2
million.
The sale of these businesses was either initiated before CBIZ adopted SFAS
No. 144 "Accounting for the Impairment of or the Disposal of Long-Lived
Assets", or did not meet the criteria for treatment as a discontinued
operation and were reported under gain on divested operations from
continuing operations.
11. SEGMENT REPORTING
CBIZ business units are aggregated into three operating practice groups:
ATA, Benefits and Insurance, and National Practices. CBIZ MMP, which is
CBIZ's medical practice management unit within the National Practices
Group, exceeded the quantitative threshold of aggregation (10% of total
revenues) as defined under SFAS No. 131, "Disclosures About Segments of
Enterprise and Related Information," in 2002, therefore requiring separate
segment disclosure. In addition, certain technology operations were
transferred from the ATA division to the National Practices division
effective January 1, 2003. Historical financial data for all balance sheet
and income statement accounts was not available for all of these technology
operations for all prior periods; therefore, prior period data is included
in the ATA results and was not reclassified between ATA and National
Practices. However, revenue information is available for 2002, as discussed
within the Management, Discussion and Analysis of the Operating Practice
Groups.
In addition to the four reportable segments disclosed, corporate and other
is also reported separately. Corporate and other includes certain operating
expenses that are not allocated to any individual unit or segment, such as
insurance costs, audit fees, consolidation and integration charges, and
costs related to other company-wide initiatives. Segment information for
the three and nine-month periods ended September 30, 2003 and 2002 were as
follows (in thousands):
11
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------------- --------------- ----------- ----------- ------------- ------------
Revenue................................ $ 43,089 37,363 19,503 19,533 - $ 119,488
Operating expenses..................... 43,318 30,846 15,362 18,567 1,503 109,596
--------------- --------------- ----------- ----------- ------------- ------------
Gross margin......................... (229) 6,517 4,141 966 (1,503) 9,892
Corporate general & administrative..... - - - - 4,567 4,567
Depreciation and amortization.......... 943 757 676 279 1,462 4,117
--------------- --------------- ----------- ----------- ------------- ------------
Operating income (loss).............. (1,172) 5,760 3,465 687 (7,532) 1,208
Other income (expense):
Interest expense..................... (13) (10) (1) - (210) (234)
Gain on sale of operations, net...... - - - - 207 207
Other income (expense), net.......... 95 (91) (3) 136 (106) 31
--------------- --------------- ----------- ----------- ------------- ------------
Total other income (expense), net 82 (101) (4) 136 (109) 4
--------------- --------------- ----------- ----------- ------------- ------------
Income (loss) from continuing
operations before income taxes....... $ (1,090) 5,659 3,461 823 (7,641) $ 1,212
=============== =============== =========== =========== ============= ============
THREE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------------- --------------- ----------- ----------- ------------- ------------
Revenue.............................. $ 43,945 34,423 17,109 19,841 - $ 115,318
Operating expenses................... 42,881 29,361 13,814 19,619 1,307 106,982
--------------- --------------- ----------- ----------- ------------- ------------
Gross margin....................... 1,064 5,062 3,295 222 (1,307) 8,336
Corporate general & administrative - - - - 4,835 4,835
Depreciation and amortization........ 1,256 878 512 452 2,319 5,417
--------------- --------------- ----------- ----------- ------------- ------------
Operating income (loss)............ (192) 4,184 2,783 (230) (8,461) (1,916)
Other income (expense):
Interest expense................... (13) (17) (2) (9) (460) (501)
Loss on sale of operations, net.... - - - - (237) (237)
Other income (expense), net........ 89 148 (5) (865) (1,288) (1,921)
--------------- --------------- ----------- ----------- ------------- ------------
Total other income (expense), net.. 76 131 (7) (874) (1,985) (2,659)
--------------- --------------- ----------- ----------- ------------- ------------
Income (loss) from continuing
operations before income taxes..... $ (116) 4,315 2,776 (1,104) (10,446) $ (4,575)
=============== =============== =========== =========== ============= ============
12
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------------- --------------- ----------- ----------- ------------- ------------
Revenue................................ $ 162,942 115,734 55,751 55,682 - $ 390,109
Operating expenses..................... 137,515 93,651 45,746 55,922 5,521 338,355
--------------- --------------- ----------- ----------- ------------- ------------
Gross margin......................... 25,427 22,083 10,005 (240) (5,521) 51,754
Corporate general & administrative..... - - - - 14,589 14,589
Depreciation and amortization.......... 3,431 2,241 1,923 874 4,256 12,725
--------------- --------------- ----------- ----------- ------------- ------------
Operating income (loss).............. 21,996 19,842 8,082 (1,114) (24,366) 24,440
Other income (expense):
Interest expense..................... (40) (54) (2) (1) (757) (854)
Gain on sale of operations, net...... - - - - 1,991 1,991
Other income (expense), net.......... 217 (6) (94) 537 (1,316) (662)
--------------- --------------- ----------- ----------- ------------- ------------
Total other income (expense), net.... 177 (60) (96) 536 (82) 475
--------------- --------------- ----------- ----------- ------------- ------------
Income (loss) from continuing
operations before income taxes....... $ 22,173 19,782 7,986 (578) (24,448) $ 24,915
=============== =============== =========== =========== ============= ============
NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------------- --------------- ----------- ----------- ------------- ------------
Revenue................................ $ 166,614 108,392 48,854 56,619 - $ 380,479
Operating expenses..................... 138,619 90,557 39,998 56,642 6,566 332,382
--------------- --------------- ----------- ----------- ------------- ------------
Gross margin......................... 27,995 17,835 8,856 (23) (6,566) 48,097
Corporate general & administrative..... - - - - 14,864 14,864
Depreciation and amortization.......... 3,594 2,793 1,411 1,191 6,314 15,303
--------------- --------------- ----------- ----------- ------------- ------------
Operating income (loss).............. 24,401 15,042 7,445 (1,214) (27,744) 17,930
Other income (expense):
Interest expense..................... (40) (59) (6) (39) (1,828) (1,972)
Gain on sale of operations, net...... - - - - 873 873
Other income (expense), net.......... 247 266 (12) (420) (396) (315)
--------------- --------------- ----------- ----------- ------------- ------------
Total other income (expense), net.... 207 207 (18) (459) (1,351) (1,414)
--------------- --------------- ----------- ----------- ------------- ------------
Income (loss) from continuing
operations before income taxes....... $ 24,608 15,249 7,427 (1,673) (29,095) $ 16,516
=============== =============== =========== =========== ============= ============
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. During the third quarter of 2003, CBIZ adopted formal
plans to divest four additional operations. These business operations are
reported as discontinued operations and the net assets and liabilities and
results of operations are reported separately in the consolidated financial
statements. One operation was closed during the first quarter of 2002 for a
loss on disposal of $0.3 million and three additional operations were
subsequently closed during the remainder of the year 2002. Five operations
still remain available for sale as of September 30, 2003.
13
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Revenue from the discontinued operations for the three and nine-months
ended September 30, 2003 were $1.1 million and $3.9 million, respectively,
compared to $3.0 million and $10.7 million for the comparable periods in
2002.
The assets and liabilities of the business units classified as discontinued
operations consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------------- -------------------
Accounts receivable, net........................... $ 5,702 $ 6,285
Property and equipment, net........................ 602 690
Deferred tax asset, net............................ 7,342 7,639
Other assets....................................... 62 88
------------------- -------------------
Assets of discontinued operations............... $ 13,708 $ 14,702
=================== ===================
Accounts payable................................... $ 138 $ 490
Accrued expenses................................... 6,436 6,966
------------------- -------------------
Liabilities of discontinued operations.......... $ 6,574 $ 7,456
=================== ===================
13. SUBSEQUENT EVENTS
On October 31, 2003, CBIZ completed the sale of an ATA business that was
classified as a discontinued operation as of September 30, 2003. CBIZ
received approximately $0.4 million in cash and stock for consideration
of the sale.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding of CBIZ's
financial position and results of operations for the three and nine months ended
September 30, 2003 and 2002.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
OPERATING PRACTICE GROUPS
CBIZ currently delivers products and services through three practice groups. A
brief description of these groups' operating results and factors affecting their
businesses is provided below.
Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory (ATA)
group contributed approximately $43.1 million and $43.9 million of revenue, or
approximately 36.1% and 38.1% of CBIZ's total revenue for the quarters ended
September 30, 2003 and 2002, respectively. The decrease in revenue attributable
to divestitures completed during or subsequent to the third quarter 2002 was
$0.1 million, offset by an increase in revenues of $0.5 million due to
acquisitions. In addition, revenue decreased by $1.2 million as a result of the
transfer of certain information technology operations to the National Practices
- - Other Segment in January 2003. For ATA businesses with a full period of
operations for the three months ended September 30, 2003 and 2002, revenue was
flat. The current weak business environment has hampered growth in this segment,
particularly in consulting and special project engagements which clients have
delayed. The ATA group reported gross margins of -0.5% and 2.4% for the three
months ended September 30, 2003 and 2002. Margins are traditionally low in the
third quarter based on the seasonality and lower revenue base during the third
quarter.
Benefits and Insurance Services. The Benefits and Insurance group contributed
approximately $37.4 million and $34.4 million of revenue, or approximately 31.3%
and 29.9% of CBIZ's total revenue for the quarter ended September 30, 2003 and
2002, respectively. Revenue growth of $2.6 million related to acquisitions
completed subsequent to the third quarter of 2002, offset by revenue decline
from divestitures of $3.4 million. For Benefits and Insurance businesses with a
full period of operations for the three-months ended September 30, 2003 and
2002, same-unit revenue increased $3.8 million, or 12.2%. Same unit revenue
increase was attributable primarily to strong sales in the specialty life
insurance and voluntary worksite units. Growth in the benefits and insurance
group is due in part to rising premium rates continuing through 2003. Since
CBIZ's commission revenue is generally based upon a percentage of premiums, this
increase in pricing has been favorable to CBIZ. Gross margin for the Benefits
and Insurance group for the three months ended September 30, 2003 was 17.4% as
compared to 14.7% for the three-months ended September 30, 2002. Improvements in
gross margin are a result of higher revenue, leveraged by the current
infrastructure costs that have not increased along with revenue increases.
National Practices Services- Medical Management Practice. CBIZ Medical
Management Professionals (CBIZ MMP), which is part of the National Practices
operating group, contributed approximately $19.5 million and $17.1 million, or
16.3% and 14.8% of CBIZ's total revenue for the quarters ended September 30,
2003 and 2002, respectively. CBIZ MMP's revenue growth of $2.4 million, or
14.0%. This increase is primarily attributable to the addition of new clients
and the expansion into new markets, such as entrance into the western region of
the United States during the later part of 2002. The gross margin for the three
months ended September 30, 2003 was 21.2% as compared to 19.3% for the three
months ended September 30, 2002. CBIZ MMP's gross margin improvement is
primarily attributable to cost containment initiatives.
National Practices Services- Other. The other units within the National
Practices group, excluding CBIZ MMP, contributed approximately $19.5 million and
$19.8 million of revenue, or approximately 16.3% and 17.2% of CBIZ's total
revenue for the quarter ended September 30, 2003 and 2002, respectively. The
decrease in revenue was primarily attributable to delays in transactions and
depressed market conditions in CBIZ's mergers and acquisitions and valuation
businesses, offset in part by the increase in revenue attributable to the
information technology businesses transferred from the ATA division to National
Practices effective January 1, 2003. The gross margin for the three months ended
September 30, 2003 was 4.9% as compared to 1.1% for the three months ended
September 30, 2002. The increase is mainly attributable to the write-off of
inventory during the
15
third quarter of 2002 that did not reoccur during the third quarter of 2003.
Revenue
Total revenue for the three months ended September 30, 2003 was $119.5 million
as compared to $115.3 million for the three months ended September 30, 2002,
representing an increase of $4.2 million, or 3.6%. The increase in revenue
attributable to acquisitions completed subsequent to June 30, 2002 was $3.1
million, and was offset by a decrease in revenue of $3.5 million due to
divestitures completed subsequent to June 30, 2002. For business units with a
full period of operations for the three months ended September 30, 2003 and
2002, revenue increased $4.6 million or 4.1%. A more comprehensive analysis of
revenue by each operating practice group is discussed above.
Expenses
Operating expenses increased to $109.6 million for the three-month period ended
September 30, 2003, from $107.0 million for the comparable period in 2002, an
increase of $2.6 million, or 2.4%. As a percentage of revenue, operating
expenses for the three-month period ended September 30, 2003 were 91.7%,
compared to 92.8% for the comparable period in 2002. The primary components of
operating expenses are personnel costs and occupancy expense. Operating expenses
included consolidation, integration and severance charges for the three months
ended September 30, 2003 and 2002 of $0.9 million and $0.5 million,
respectively. Excluding consolidation and integration charges, operating
expenses were $108.7 million or 91.0% as a percentage of revenue, for the
three-month period ended September 30, 2003, compared to $106.5 million, or
92.3% as a percentage of revenue, for the comparable period in 2002. CBIZ
believes that this information may provide additional meaningful information in
evaluating the company's performance.
Corporate general and administrative expenses decreased to $4.6 million for the
three-month period ended September 30, 2003, from $4.8 million for the
comparable period in 2002. Corporate general and administrative expenses
represented 3.8% of total revenues for the three-month period ended September
30, 2003, down from 4.2% for the comparable period in 2002. The decrease in
corporate general and administrative costs was primarily due to a decrease in
legal costs, as the level of legal expenses to pursue cases concerning
non-competition violations by former employees and other cases in which CBIZ is
involved, was higher in 2002.
Depreciation and amortization expense decreased to $4.1 million for the
three-month period ended September 30, 2003, from $5.4 million for the
comparable period in 2002, a decrease of $1.3 million, or 24.0%. The decrease is
attributable to asset retirements, fully depreciated assets, and the shift from
purchasing computer-related items and furniture to leasing such items. These
operating lease costs are recorded as operating expenses, rather than
capitalized and recorded as depreciation. As a percentage of total revenues,
depreciation and amortization expense was 3.4% for the three-month period ended
September 30, 2003, compared to 4.7% for the comparable period in 2002.
Interest expense decreased to $0.2 million for the three-month period ended
September 30, 2003, from $0.5 million for the comparable period in 2002, a
decrease of $0.3 million, or 53.3%. The decrease is the result of a lower
average outstanding debt of $21.6 million during the third quarter of 2003,
compared to $30.2 million during the third quarter of 2002, and average interest
rates were approximately 3.3% during the third quarter of 2003, as compared to
5.7% during the third quarter 2002.
Gain on sale of operations, net was $0.2 million for the three months ended
September 30, 2003, and was related to the sale of two operations in the ATA
division. Loss on sale of operations, net was $0.2 million for the three months
ended September 30, 2002, and was related to the closing of one business
operation. See Note 10 to CBIZ's consolidated financial statements included
herewith.
CBIZ reported other income of $31,000 for the three-month period ended September
30, 2003, compared to other expense of $1.9 million for the comparable period in
2002, a decrease in expenses of $2.0 million. Other income (expense), net is
comprised primarily of interest income earned on funds held for clients at
CBIZ's payroll business, gain and losses on sale of assets, charges for legal
reserves and settlements and miscellaneous income such as contingent royalties
from previous divestitures. The change is primarily related to $2.4 million of
impairment charges to notes receivable and investments during the third quarter
of 2002 that did not recur in the third quarter of 2003.
16
CBIZ recorded income tax expense from continuing operations of $1.0 million for
the three-month periods ended September 30, 2003 compared to an income tax
benefit of $0.5 million and 2002. Income taxes were adjusted in the third
quarter of 2003 based on an annual effective tax rate of 44.5% for 2003,
compared to an annual effective tax rate of 51.9% for the comparable period in
2002. The annual effective tax rate for 2003 is higher than the statutory
federal and state tax rates primarily due to capital losses resulting from
certain impairment charges that are not offset by capital gains, and therefore
not deductible and are not expected to be deductible in future periods. See "For
the nine months ended September 30, 2003 and 2002" for further discussion
regarding the annual effective tax rate.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
OPERATING PRACTICE GROUPS
Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory (ATA)
group contributed approximately $162.9 million and $166.6 million of revenue, or
approximately 41.8% and 43.8% of CBIZ's total revenue for the nine months ended
September 30, 2003 and 2002, respectively. The decrease in revenue attributable
to divestitures completed subsequent to June 30, 2002 was $1.4 million, offset
by an increase in revenues of $0.8 million due to acquisitions. In addition,
revenue decreased by $4.4 million as a result of the transfer of the certain
information technology operations to the National Practices - Other Segment in
January 2003. For ATA businesses with a full period of operations for the nine
months ended September 30, 2003 and 2002, revenue increased $1.2 million, or
0.7%. The current weak business environment has hampered growth in this segment,
particularly in consulting and special project engagements which clients have
delayed. The ATA group reported gross margins of 15.6% and 16.8% for the nine
months ended September 30, 2003 and 2002. Margins have declined due to decreased
revenue, resulting in increased compensation expense as a percent of revenue
during 2003. A portion of compensation expense is related to achieving annual
performance targets, and therefore may be adjusted if such annual performance
targets are not met.
Benefits and Insurance Services. The Benefits and Insurance group contributed
approximately $115.7 million and $108.4 million of revenue, or approximately
29.7% and 28.5% of CBIZ's total revenue for the nine months ended September 30,
2003 and 2002, respectively. Revenue growth of $6.8 million related to
acquisitions completed subsequent to the September 30, 2002, offset by revenue
decline from divestitures of $4.1 million. For Benefits and Insurance businesses
with a full period of operations for the three-months ended September 30, 2003
and 2002, same-unit revenue increased $4.7 million, or 4.7%. Same unit revenue
increase was attributable primarily to strong sales in single premium life
insurance, specialty life insurance, and voluntary worksite units. Growth in the
benefits and insurance group is due in part to the rising premium rates
continuing through 2003. Since CBIZ's commission revenue is generally based upon
a percentage of premiums, this increase in pricing has been favorable to CBIZ.
Gross margin for the Benefits and Insurance group for the nine months ended
September 30, 2003 was 19.1% as compared to 16.5% for the nine months ended
September 30, 2002. Improvements in gross margin are a result of higher revenue,
leveraged by the current infrastructure costs that have not increased along with
revenue increases.
National Practices Services- Medical Management Practice. CBIZ Medical
Management Professionals (CBIZ MMP), which is part of the National Practices
operating group, contributed approximately $55.7 million and $48.9 million, or
14.3% and 12.8%, of CBIZ's total revenue for the nine months ended September 30,
2003 and 2002, respectively. CBIZ MMP's revenue growth of $6.8 million, or
14.0%. This increase is primarily attributable to the addition of new clients
and the expansion into new markets, such as entrance into the western region of
the United States during the later part of 2002. The gross margin for the nine
months ended September 30, 2003 was 17.9% as compared to 18.1% for the nine
months ended September 30, 2002.
National Practices Services- Other. The other units within the National
Practices group, excluding CBIZ MMP, contributed approximately $55.7 million and
$56.6 million of revenue, or approximately 14.3% and 14.9% of CBIZ's total
revenue for the nine months ended September 30, 2003 and 2002, respectively. The
decrease in revenue was primarily attributable to delays in transactions and
depressed market conditions in CBIZ's mergers and acquisitions and valuation
businesses, offset in part by the increase in revenue attributable to the
information technology businesses transferred from the ATA division to National
Practices effective January 1, 2003. The gross margin for the nine months ended
September 30, 2003 and 2002 was flat due to continued weakness in CBIZ's mergers
and acquisition, valuation, and IT consulting businesses.
17
Revenue
Total revenue for the nine months ended September 30, 2003 was $390.1 million as
compared to $380.5 million for the nine months ended September 30, 2002,
representing an increase of $9.6 million, or 2.5%. The increase in revenue
attributable to acquisitions completed subsequent to June 30, 2002 was $7.5
million, and was offset by a decrease in revenue of $5.5 million due to
divestitures completed subsequent to June 30, 2002. For business units with a
full period of operations for the nine months ended September 30, 2003 and 2002,
revenue increased $7.6 million or 2.1%. A more comprehensive analysis of revenue
by each operating practice group is discussed above.
Expenses
Operating expenses increased to $338.4 million for the nine months ended
September 30, 2003, from $332.4 million for the comparable period in 2002, an
increase of $6.0 million, or 1.8%. As a percentage of revenue, operating
expenses for the nine months ended September 30, 2003 were 86.7%, compared to
87.4% for the comparable period in 2002. The primary components of operating
expenses are personnel costs and occupancy expense. Operating expenses were
impacted by consolidation and integration charges of $1.6 million and $3.4
million for the nine months ended September 30, 2003 and 2002, respectively.
Excluding consolidation and integration charges, operating expenses were $336.8
million or 86.3% as a percentage of revenue, for the nine months ended September
30, 2003, compared to $329.0 million, or 86.4% as a percentage of revenue, for
the comparable period in 2002. CBIZ believes that this information may provide
additional meaningful information in evaluating the company's performance.
Operating expenses increased primarily due to increased compensation expense of
$9.6 million related to (i) additional hires to CBIZ's medical practice
management unit to support its growth, (ii) higher commission expense in the
Benefits and Insurance practice group related to the increased revenue and,
(iii) the addition of several former Arthur Andersen, LLP professionals to the
ATA practice group. The increase was also offset by general staff reductions at
certain business units, as well as a decrease in bad debt expense of $2.2
million.
Corporate general and administrative expenses decreased to $14.6 million for the
nine months ended September 30, 2003, from $14.9 million for the comparable
period in 2002. Corporate general and administrative expenses represented 3.7%
of total revenues for the nine months ended September 30, 2003, down from 3.9%
for the comparable period in 2002. Changes in corporate general and
administrative costs were primarily driven by an increase in severance costs of
approximately $0.7 million incurred related to reductions in corporate staff
during the first quarter of 2003, offset by a decrease of $1.7 million in
certain legal expenses, as the level of legal expenses to pursue non-competition
violations by former employees was higher in 2002.
Depreciation and amortization expense decreased to $12.7 million for the nine
months ended September 30, 2003, from $15.3 million for the comparable period in
2002, a decrease of $2.6 million, or 16.8%. The decrease is attributable to
asset retirements, fully depreciated assets, and the shift from purchasing
computer-related items to leasing such items. These operating lease costs are
recorded as operating expenses, rather than capitalized and recorded as
depreciation. As a percentage of total revenues, depreciation and amortization
expense was 3.3% for the nine months ended September 30, 2003, compared to 4.0%
for the comparable period in 2002.
Interest expense decreased to $0.9 million for the nine months ended September
30, 2003, from $2.0 million for the comparable period in 2002, a decrease of
$1.1 million, or 56.7%. The decrease is the result of a lower average
outstanding debt of $17.2 million during the first nine months of 2003, compared
to $43.6 million during the comparable period in 2002, and a lower average
interest rate of 4.7% during the first nine months of 2003, compared to 5.6%
during the comparable period in 2002.
Gain on sale of operations, net was $2.0 million for the nine months ended
September 30, 2003, and was related to the sale or closing of four business
operations. Gain on sale of operations, net was $0.9 million for the nine
months ended September 30, 2002, and was related to the sale or closing of ten
businesses operations. See Note 10 to CBIZ's consolidated financial statements
included herewith.
CBIZ reported other expense of $0.7 million for the nine months ended September
30, 2003, compared to other expense of $0.3 million for the comparable period in
2002, an increase in expense of $0.4 million. Other income (expense), net is
comprised primarily of interest income earned on funds held for clients at
CBIZ's payroll
18
business, gains and losses on sale of assets, charges for legal reserves and
settlements, and miscellaneous income such as contingent royalties from previous
divestitures. For the nine months ended September 30, 2003, other expense is
primarily related to $2.0 million of impairment charges to notes receivable,
offset by interest income of $0.8 million. For the nine months ended September
30, 2002, other expense is primarily related to $2.4 million of impairment
charges related to notes receivable and investments the company previously made
in high tech start-up ventures, offset by interest income of $1.0 million.
CBIZ recorded income taxes from continuing operations of $11.1 million for the
nine months ended September 30, 2003, compared to $8.6 million recorded for the
nine months ended September 30, 2002. The effective tax rate decreased to 44.5%
for the nine months ended September 30, 2003, from 51.9% for the comparable
period in 2002. Income taxes are provided based on CBIZ's anticipated annual
effective tax rate. The estimated annual effective tax rate is subject to a
number of factors and may change based on changes in annual estimated pretax
income, revisions to tax positions taken as a result of further analysis, or
changes resulting from audits by taxing authorities The effective tax rate for
the nine-months ended September 30, 2003, is higher than the statutory federal
and state tax rates of approximately 40% primarily due capital losses resulting
from certain impairment charges, that are not offset by capital gains, and
therefore currently not deductible. The effective tax rate for the nine-months
ended September 30, 2002, 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 2002, CBIZ adopted formal plans to divest five non-core operations which
were no longer part of CBIZ's strategic long-term growth objectives. During the
third quarter of 2003, CBIZ adopted formal plans to divest four additional
operations. These operations have been classified as discontinued operations in
accordance with the adoption of Statement of Financial Accounting Standards
(SFAS) 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
and the assets, liabilities, and results of operations are reported separately
in the consolidated financial statements. One of these operations was closed
during the first quarter of 2002 and an additional three units were subsequently
sold or closed as of December 31, 2002. Five operations still remain available
for sale as of September 30, 2003. Based on the estimated cost of closure, CBIZ
recorded a loss on disposal from discontinued operations, net of tax, of $0.2
million and $0.4 million for the three and nine months ended September 30, 2003,
compared to $1.9 million and $3.1 million for the comparable periods in 2002.
Revenue associated with these eight discontinued operations for the three and
nine months ended September 30, 2003 was $1.1 million and $3.9 million,
respectively, compared to $3.0 million and $10.7 million for the comparable
periods in 2002, respectively. The loss from operations, net of tax, associated
with these divestitures for the three months ended September 30, 2003 and 2002
was $0.2 million and $0.1 million, respectively, compared to a loss from
operations, net of tax, of $0.4 million and $0.5 million for the nine months
ended September 30, 2003 and 2002, respectively.
RESULTS OF OPERATIONS -- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, CBIZ adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually at the reporting unit level. SFAS 142 also requires
intangible assets with finite useful lives to be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS 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
Restricted cash at September 30, 2003 was $12.8 million, a decrease of $4.2
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 $30.9 million at September 30, 2003, a decrease of $18.3 million
from December 31, 2002. Funds held for clients represent funds collected from
clients for payroll and related services administered by CBIZ, and are offset by
client fund obligations. 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 $112.3 million at September 30, 2003 compared to
$102.2 million at December 31, 2002, an increase of $10.1 million. The increase
in receivables is primarily attributed to increased revenue from internal growth
and acquisitions. Income tax receivable decreased
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by $5.0 million, based on tax refunds received during 2003. Notes receivable
(current and non-current) at September 30, 2003 decreased $5.3 million from
December 31, 2002, primarily related to a $2.0 million impairment charge, and a
$2.1 million note contributed towards the acquisition of HarborView Partners in
Stamford, Connecticut.
Current liabilities before client fund obligations increased $3.2 million from
December 31, 2002 primarily related to an increase in income taxes payable of
$6.6 million. Client fund obligations were $30.9 million, a decrease of $18.3
million from December 31, 2002. Client fund obligations fluctuate during the
year based on the timing of cash receipts and related payments. CBIZ's bank debt
balance was $23.0 million at September 30, 2003, compared to $17.5 million at
December 31, 2002, an increase of $5.5 million. The increase is primarily
related to $30 million borrowed during the third quarter of 2003 to fund the
repurchase of CBIZ common stock through the modified Dutch Auction tender offer,
offset by payments on the debt during the nine months ended September 30, 2003
based on positive cash flow.
Stockholders' equity decreased by $19.2 million, primarily related to the $33.7
million of additional treasury stock acquired through the modified Dutch Auction
tender offer, as well as open market purchases. This decrease was offset by net
income of $13.0 million earned for the nine months ended September 30, 2003, and
$1.2 million related to the exercise of stock options.
LIQUIDITY AND CAPITAL RESOURCES
CBIZ's bank line of credit is a $73.0 million revolving credit facility with
Bank of America as the agent bank. The credit facility carries an option to
increase the total commitment to $80 million and allows for the allocation of
funds for strategic initiatives, including acquisitions and the repurchase of
CBIZ common stock. CBIZ expects to use the facility for working capital,
internal growth initiatives, and its acquisition program. The facility has a
three-year term with an expiration date of September 2005. CBIZ is currently in
compliance with all covenants under its credit facility.
At September 30, 2003, CBIZ had $23.0 million outstanding under its credit
facility, leaving approximately $33.8 million of available funds under the
facility based on the borrowing base calculation. Management believes that those
available funds, along with cash generated from operations, will be sufficient
to meet its liquidity needs in the foreseeable future. See Note 4 to CBIZ's
consolidated financial statements included herewith for additional information
regarding the credit facility.
SOURCES AND USES OF CASH
Cash provided by operating activities and funds available from CBIZ's credit
facility provide the resources to support current operations, projected growth,
acquisitions, capital expenditures, and share repurchases. Net cash provided by
operating activities was $30.4 million and $37.3 million for the nine months
ended September 30, 2003 and 2002, respectively, and was the primary source of
funds used to fund acquisitions and the repurchase of CBIZ common stock. 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 nine months ended September 30,
2003 of $4.4 million primarily consisted of $7.7 million used for capital
expenditures and $3.3 million used toward the acquisitions of two benefits and
insurance firms, an ATA firm, and several client lists. Cash provided by
investing activities include $5.0 million of proceeds from the divestiture of
four businesses. Capital expenditures consisted of leasehold improvements and
equipment in connection with the consolidation of certain offices, IT capital to
support the growth of the medical practice management unit and equipment
purchases in relation to normal replacement. During the nine months ended
September 30, 2003, the majority of the capital expenditures were related to the
build-out of the new Kansas City facility completed in June and software
expenditures to support the CNECT project. Net cash used in investing activities
during the nine months ended September 30, 2002 of $2.2 million consisted of
$7.4 million used for capital expenditures, offset by the proceeds from the
divestiture of ten business units of $3.6 million and the collections of notes
receivable of $1.6 million.
Net cash used in financing activities was $27.9 million in 2003 compared to
$29.7 million in 2002. Proceeds from bank debt and net cash provided by
operating activities were primarily used to fund the repurchase of $33.5 million
of CBIZ stock. In July of 2003, CBIZ completed its modified Dutch Auction tender
offer which resulted in
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the purchase of approximately 9.9 million shares of common stock at a purchase
price of $3.30 per share, or a total cost (including expenses) of approximately
$33.2 million. In addition, CBIZ repurchased approximately 104,000 shares in the
open market for approximately $0.3 million.
INTEREST RATE RISK MANAGEMENT
CBIZ entered into an interest rate swap agreement in the third quarter of 2001
to reduce the impact of potential rate increases on variable rate debt through
its credit facility. Based on the company's continued strong cash flow and its
ability to completely pay down its credit facility, the remaining notional
amount of $10 million under the swap was unwound during the quarter ended June
30, 2003. As a result, $0.2 million previously recorded as accumulated other
comprehensive loss in stockholders' equity was charged to interest expense
during the nine months ended September 30, 2003.
CRITICAL ACCOUNTING POLICIES
The policies discussed below are considered by management to be critical to the
understanding of CBIZ's consolidated financial statements because their
application places significant demand on management's judgment, and financial
reporting results rely on estimation about the effects of matters that are
inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these policies, management
cautions that estimates may require adjustment if future events develop
differently than expected.
REVENUE RECOGNITION AND VALUATION OF UNBILLED REVENUES
Revenue is recognized only when all of the following are present: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) our fee to the client is fixed or determinable; and (iv)
collectibility is reasonably assured, which is in accordance with generally
accepted accounting principles and SEC Staff Accounting Bulletin No. 101. CBIZ
offers a vast array of products and outsourced business services to its clients.
Those services are delivered through three segments. A description of revenue
recognition, as it relates to those segments, is provided below:
ACCOUNTING, TAX AND ADVISORY SERVICES - Revenue consists primarily of fees for
accounting services, preparation of tax returns and consulting services.
Revenues are recorded in the period in which they are earned. CBIZ bills clients
based upon a predetermined agreed upon fixed fee or actual hours incurred on
client projects at expected net realizable rates per hour, plus any
out-of-pocket expenses. The cumulative impact on any subsequent revision in the
estimated realizable value of unbilled fees for a particular client project is
reflected in the period in which the change becomes known.
BENEFITS & INSURANCE - Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans. A
description of the revenue recognition, based on insurance products and billing
arrangements, is described below:
- Commissions relating to brokerage and agency activities whereby CBIZ
has primary responsibility for the collection of premiums from
insured's (agency or indirect billing) are generally recognized as of
the earlier of the effective date of the insurance policy or the date
billed to the customer.
- Commissions to be received directly from insurance companies (direct
billing) are generally recognized when the amounts are determined.
- Life insurance commissions are generally recognized when the amounts
are determined.
- Commission revenue is reported net of sub-broker commissions.
- Contingent commissions are recognized at the earlier of notification
or cash collection.
- Fee income is recognized in the period earned, and may be based on
actual hours incurred on an hourly fee basis, fixed fee arrangements
or asset-based fees.
NATIONAL PRACTICES - The business units that comprise this division offer a
variety of services. A description of revenue recognition associated with the
primary services is provided below:
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- Mergers & Acquisitions and Capital Advisory - Revenue associated with
non-refundable retainers are recognized on a pro rata basis over the
life of the engagement. Revenue associated with success fee
transactions are recognized when the transaction is completed.
- Technology Consulting - Revenue associated with hardware and software
sales is recognized upon delivery and acceptance of the product.
Revenue associated with installation and service agreements are
recognized as services are performed. Consulting revenue is recognized
on an hourly or per diem fee basis.
- Valuation and Property Tax - Revenue associated with retainer
contracts are recognized on a pro rata basis over the life of the
contract, which is generally twelve months. Revenue associated with
contingency arrangements is recognized when written notification is
received from an outside third party (e.g., the assessor in the case
of a property tax engagement) acknowledging that the contingency has
been completed).
- Medical Practice Management - Revenue is recognized when payments are
received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
The preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Specifically, management must make estimates of the
collectibility of our accounts receivable, including unbilled accounts
receivable, related to current period service revenue. Management analyzes
historical bad debts, client credit-worthiness, and current economic trends and
conditions when evaluating the adequacy of the allowance for doubtful accounts
and the collectibility of notes receivable. Significant management judgments and
estimates must be made and used in connection with establishing the allowance
for doubtful accounts in any accounting period. Material differences may result
if management made different judgments or utilized different estimates.
VALUATION OF GOODWILL
Effective January 1, 2002, CBIZ adopted the provisions of SFAS 142 and
accordingly ceased amortization of our remaining goodwill balance. During 2002,
CBIZ completed the process of evaluating our goodwill for impairment 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. CBIZ conducts a formal
impairment test of goodwill on an annual basis and between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value.
VALUATION OF INVESTMENTS
CBIZ has held certain investments in privately held companies during their
start-up or development stages, which are included in "other assets" in the
accompanying unaudited consolidated balance sheets. These investments are
inherently risky as the market for the technologies or products these companies
have under development are typically in the early stages. The value of these
investments is influenced by many factors, including the operating effectiveness
of these companies, the overall health of the companies' industries, the
strength of the private equity markets and general market conditions. Although
the market value of these investments are not readily determinable, management
believes their current fair values approximate their carrying values at the
respective balance sheet dates. At September 30, 2003, CBIZ held one investment
for approximately $0.6 million. In light of the circumstances noted above,
particularly with respect to the current economic environment, it is possible
that the fair value of this investment could decline in future periods, and
further impairment could occur.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as liabilities
when it is probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Contingent liabilities are often resolved over
long time periods. Estimating probable losses requires analysis that often
depends on judgment regarding potential actions by third parties.
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ESTIMATES OF INCENTIVE COMPENSATION COSTS AND EFFECTIVE INCOME TAX RATES
Incentive compensation costs and income tax expense are two significant expense
categories that are highly dependent upon management estimates and judgments,
particularly at each interim reporting date. In arriving at the amount of
expense to recognize, management believes it makes reasonable estimates and
judgments using all significant information available. Incentive compensation
costs are accrued on a monthly basis; however, the ultimate determination is
made after our year-end results are finalized; thus, estimates are subject to
change. Circumstances that could cause our estimates of effective income tax
rates to change include the impact of information that subsequently becomes
available as we prepared our corporate income tax returns; the level of actual
full-year pre-tax income; revisions to tax positions taken as a result of
further analysis and consultation; and changes mandated as a result of audits by
taxing authorities.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above are nevertheless important to
understanding the consolidated financial statements. Those policies are
described in Note 1 to the consolidated financial statements contained in our
Annual Report on Form 10-K for the year ended December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation 46 (FIN 46), "Consolidation of
Variable Interest Entities." FIN 46 addresses the consolidation of variable
interest entities (VIEs) that have the characteristics of equity investments at
risk not sufficient to permit the entity to finance its activities without
additional financial support from other parties, or VIEs in which the equity
investor lacks essential characteristics of a controlling financial interest.
The consolidation requirements of FIN 46 apply immediately to VIE's created
after January 31, 2003. The consolidation requirements apply to entities
existing prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply to
all financial statements issued after January 31, 2003 regardless of when the
VIE was established. In October 2003, the FASB issued FASB Staff Position FIN
46-6 which deferred the application of FIN 46 for public entities until the
first interim period ending after December 15, 2003, for VIEs acquired before
February 1, 2003. In addition to the issuance of FIN 46-6, the FASB has also
proposed significant changes regarding the scope of FIN 46, clarification of
certain provisions, and added disclosures, for which the comments period ends
December 1, 2003. CBIZ has evaluated FIN 46 as of September 30, 2003 and does
not believe it holds any interest in VIEs that would require consolidation.
However, CBIZ will continue to evaluate the standard based on additional
guidance and potential changes provided by the FASB.
In January 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement will improve
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly, and will result in more consistent reporting of
contracts as either derivatives or hybrid instruments. This Statement is
effective for contracts entered into or modified after September 30, 2003. CBIZ
does not believe this Statement will have a material impact on its financial
position, results of operations, or cash flows.
FORWARD-LOOKING STATEMENTS
This 10-Q Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this 10-Q Report, including without limitation, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding CBIZ's financial position, business strategy and plans and objectives
for future performance are forward-looking statements. Forward-looking
statements are commonly identified by the use of such terms and phrases as
"intends," "believes," "estimates," "expects," "projects," "anticipates,"
"foreseeable future," "seeks," and words or phases of similar import. Such
statements are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or assumptions materialize, or should the underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Such risks and uncertainties include, but
are not limited to, CBIZ's ability to adequately manage its growth; CBIZ's
dependence on the services of its CEO and other key employees; competitive
pricing pressures; general business and economic conditions; and changes in
governmental regulation and tax laws
23
affecting its operations. Consequently, no forward-looking statement can be
guaranteed. A more detailed description of risks and uncertainties may be found
in CBIZ's Annual Report on Form 10-K. CBIZ undertakes no obligation to publicly
update forward-looking statements, whether as a result of new information,
future events or otherwise. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Quantitative Information About Market Risk. CBIZ's floating rate debt under its
credit facility exposes the Company to interest rate risk. A change in the
Federal Funds Rate, or the Reference Rate set by the Bank of America (San
Francisco), would affect the rate at which CBIZ could borrow funds under its
credit facility. CBIZ had entered into an interest rate swap during 2001 to
minimize the potential impact of future increases in interest rates. This
interest rate swap was terminated during the second quarter of 2003, in concert
with the reduction in debt. See Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate Risk Management,"
for a further discussion of this financial instrument.
CBIZ does not engage in trading market risk sensitive instruments. Except for
the interest rate swap discussed above, CBIZ does not purchase instruments,
hedges, or "other than trading" instruments that are likely to expose CBIZ to
market risk, whether foreign currency exchange, commodity price or equity price
risk. CBIZ has not issued debt instruments, entered into forward or futures
contracts or purchased options.
Qualitative Information About Market Risk. CBIZ's primary market risk exposure
is that of interest rate risk. A change in the Federal Funds Rate, or the
reference rate set by the Bank of America (San Francisco), would affect the rate
at which CBIZ could borrow funds under its credit facility. See "Quantitative
Information about Market Risk" for a further discussion on the potential impact
of a change in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer have evaluated the
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as of the end of the period covered by this quarterly
report. Based on this evaluation they concluded that the disclosure controls and
procedures effectively ensure that information required to be disclosed in our
filings and submissions under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no significant changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect the internal control over financial reporting, during the quarter covered
by this report. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
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32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the three
months ended September 30, 2003:
On July 31, 2003, CBIZ filed a current report on Form 8-K to provide
investors with its second quarter earnings, as released to the public
and discussed on a conference call on July 29, 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: November 13, 2003 By: /s/ WARE H. GROVE
------------------- --------------------------
Ware H. Grove
Chief Financial Officer
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