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, 2004
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)
6050 Oak Tree Boulevard, South, Suite 500, Cleveland, Ohio 44131
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
N/A
- --------------------------------------------------------------------------------
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, 2004
------------------------ ----------------------
Par value $.01 per share 76,537,921
1
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 5
Notes to the Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-34
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION :
Item 1. Legal Proceedings 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 6. Exhibits and Reports on Form 8-K 37-38
Signature 39
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 3,977 $ 3,791
Restricted cash............................................ 13,807 10,880
Accounts receivable, net................................... 112,116 109,436
Notes receivable - current................................. 1,425 1,315
Income taxes recoverable................................... - 438
Deferred income taxes - current............................ 3,794 3,360
Other current assets....................................... 9,083 7,651
Assets of businesses held for sale......................... 1,013 3,179
--------- ---------
Current assets before funds held for clients........... 145,215 140,050
Funds held for clients..................................... 48,027 44,917
--------- ---------
Total current assets................................... 193,242 184,967
Property and equipment, net.................................. 38,575 40,095
Notes receivable - non-current............................... 3,134 2,433
Deferred income taxes - non-current.......................... 7,491 4,215
Goodwill and other intangible assets, net.................... 170,924 167,280
Other assets................................................. 7,273 3,155
--------- ---------
Total assets........................................... $ 420,639 $ 402,145
========= =========
LIABILITIES
Current liabilities:
Accounts payable........................................... $ 28,103 $ 28,495
Income taxes payable....................................... 1,279 -
Other current liabilities.................................. 34,928 34,178
Liabilities of businesses held for sale.................... 452 826
--------- ---------
Current liabilities before client fund obligations..... 64,762 63,499
Client fund obligations.................................... 48,027 44,917
--------- ---------
Total current liabilities............................. 112,789 108,416
Bank debt.................................................... 52,500 14,000
Other non-current liabilities................................ 6,278 1,891
--------- ---------
Total liabilities..................................... 171,567 124,307
--------- ---------
STOCKHOLDERS' EQUITY
Common stock................................................. 962 957
Additional paid-in capital................................... 443,758 441,407
Accumulated deficit.......................................... (115,119) (129,438)
Treasury stock............................................... (80,518) (35,087)
Accumulated other comprehensive loss......................... (11) (1)
--------- ---------
Total stockholders' equity............................ 249,072 277,838
--------- ---------
Total liabilities and stockholders' equity............ $ 420,639 $ 402,145
========= =========
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,
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenue......................................................... $ 121,550 $ 117,396 $ 394,515 $ 383,893
Operating expenses.............................................. 109,877 107,394 340,617 332,034
--------- --------- --------- ---------
Gross margin.................................................... 11,673 10,002 53,898 51,859
Corporate general and administrative expense.................... 6,841 4,940 18,275 14,633
Depreciation and amortization expense........................... 4,105 4,095 12,216 12,653
--------- --------- --------- ---------
Operating income................................................ 727 967 23,407 24,573
Other income (expense):
Interest expense.............................................. (369) (234) (1,038) (854)
Gain on sale of operations, net............................... 78 207 996 1,991
Other income (expense), net................................... 527 452 1,358 (558)
--------- --------- --------- ---------
Total other income, net.................................. 236 425 1,316 579
Income from continuing operations before
income tax expense........................................... 963 1,392 24,723 25,152
Income tax expense.............................................. 473 1,068 10,053 11,155
--------- --------- --------- ---------
Income from continuing operations............................... 490 324 14,670 13,997
Loss from operations of discontinued businesses, net of tax..... (372) (352) (589) (594)
Gain (loss) on disposal of discontinued businesses, net of tax.. 238 (210) 238 (393)
--------- --------- --------- ---------
Net income (loss)............................................... $ 356 $ (238) $ 14,319 $ 13,010
========= ========= ========= =========
Earnings (loss) per share:
Basic:
Continuing operations...................................... $ 0.01 $ - $ 0.18 $ 0.15
Discontinued operations.................................... - - - (0.01)
--------- --------- --------- ---------
Net income (loss).......................................... $ 0.01 $ - $ 0.18 $ 0.14
========= ========= ========= =========
Diluted:
Continuing operations...................................... $ 0.01 $ - $ 0.18 $ 0.15
Discontinued operations.................................... - - (0.01) (0.01)
--------- --------- --------- ---------
Net income (loss).......................................... $ 0.01 $ - $ 0.17 $ 0.14
========= ========= ========= =========
Basic weighted average shares outstanding....................... 77,311 86,228 80,200 92,118
========= ========= ========= =========
Diluted weighted average shares outstanding..................... 79,373 88,971 82,480 94,267
========= ========= ========= =========
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,
-------------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 14,319 $ 13,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from operations of discontinued businesses......................... 589 594
(Gain) loss on disposal of discontinued businesses...................... (238) 393
Gain on sale of operations.............................................. (996) (1,991)
Bad debt expense, net of recoveries..................................... 3,110 3,406
Impairment of notes receivable.......................................... --- 1,625
Notes payable extinguishment............................................ (428) ---
Depreciation and amortization........................................... 12,216 12,653
Deferred income taxes................................................... (3,710) 954
Changes in assets and liabilities, net of acquisitions and dispositions:
Restricted cash......................................................... (2,927) 4,018
Accounts receivable, net................................................ (6,243) (13,278)
Other assets............................................................ (6,643) (777)
Accounts payable........................................................ (195) 1,396
Income taxes............................................................ 1,393 11,567
Accrued expenses and other liabilities.................................. 2,059 (2,197)
--------- ---------
Net cash provided by continuing operations................................... 12,306 31,373
Net cash used in discontinued operations..................................... (482) (980)
--------- ---------
Net cash provided by operating activities.................................... 11,824 30,393
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired and contingent
consideration earned..................................................... (4,322) (3,256)
Cash proceeds from divested operations and client lists................... 3,030 5,045
Additions to property and equipment, net.................................. (6,245) (7,639)
Net decrease in notes receivable.......................................... 1,738 1,473
--------- ---------
Net cash used in investing activities........................................ (5,799) (4,377)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt................................................... 213,405 165,200
Proceeds from notes payable............................................... --- 383
Payment of bank debt...................................................... (174,905) (159,700)
Payment of notes payable and capitalized leases........................... (296) (1,038)
Payment for acquisition of treasury stock................................. (45,287) (33,523)
Proceeds from exercise of stock options and warrants...................... 1,244 733
--------- ---------
Net cash used in financing activities........................................ (5,839) (27,945)
--------- ---------
Net increase(decrease) in cash and cash equivalents.......................... 186 (1,929)
Cash and cash equivalents at beginning of year............................... 3,791 6,351
--------- ---------
Cash and cash equivalents at end of period................................... $ 3,977 $ 4,422
========= =========
See the accompanying notes to the consolidated financial statements.
5
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
(GAAP) for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange
Commission. Accordingly, they do not include all of the information and
notes required by GAAP for annual financial statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting solely of normal
recurring adjustments) considered necessary to present fairly the
financial position of Century Business Services, Inc. and its consolidated
subsidiaries (CBIZ) as of September 30, 2004, and December 31, 2003, and
the results of their operations for the three and nine months ended
September 30, 2004, and 2003 and cash flows for the nine months ended
September 30, 2004 and 2003. The results of operations for such interim
periods are not necessarily indicative of the results for the full year.
For further information, refer to the consolidated financial statements
and notes thereto included in CBIZ's annual report on Form 10-K for the
year ended December 31, 2003. 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 consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the current year presentation.
Reclassifications include: legal settlements (previously reported as other
income (expense), net, which are now reported as corporate general and
administrative expense) and discontinued operations.
Operating Expenses
Operating expenses represent costs incurred by our operating business
units, and consist primarily of personnel and occupancy related expenses.
Personnel costs include base compensation, payroll taxes, and benefits,
which are recognized as expense as they are incurred, and incentive
compensation costs which are estimated and accrued on a monthly basis. The
ultimate determination of incentive compensation is made after our
year-end results are finalized; thus, estimates are subject to change.
Total personnel costs were $79.0 million and $76.3 million for the three
months ended September 30, 2004 and 2003, and $248.4 million and $243.3
million for the nine months ended September 30, 2004 and 2003,
respectively.
The largest components of occupancy costs are rent expense and utilities.
Rent expense is recognized over respective lease terms, and utilities are
recognized as incurred. Total facility costs were $8.6 million and $8.7
million for the three months ended September 30, 2004 and 2003, and $26.3
million and $25.8 million for the nine months ended September 30, 2004 and
2003, respectively.
Consolidation and integration charges are included in operating expenses,
and are accounted for in accordance with Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." Accordingly, CBIZ recognizes a liability for noncancellable
lease obligations based upon the net present value of remaining lease
payments, net of estimated sublease payments. The liability is determined
and recognized as of the cease-use date. Adjustments to the liability are
made for changes in estimates in the period in which the change becomes
known. See further discussion in Note 6.
6
Funds Held for Clients and Client Fund Obligations
As part of our payroll and property tax management services, CBIZ is
engaged in the preparation of payroll checks, federal, state, and local
payroll tax returns, property tax payments and flexible spending account
administration. In relation to these services, CBIZ collects funds from
its client's accounts in advance of paying these client obligations. Funds
that are collected before they are due are held in an account in CBIZ's
name and invested in short-term investment grade instruments with a
maturity of twelve months or less from the date of purchase. These funds,
which may include cash, cash equivalents and short-term investments, are
segregated and reported separately as funds held for clients. There are no
regulatory or other contractual restrictions placed on these funds. Funds
held for clients and the related client fund obligations are included in
the consolidated balance sheets as current assets and current liabilities,
respectively. The amounts of collected, but not yet remitted funds for
CBIZ's payroll and property tax management services vary significantly
during the year.
Stock-Based Compensation
CBIZ accounts for its stock-based compensation plans under the intrinsic
value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. CBIZ does not recognize
compensation expense related to stock options, as all options are granted
at 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 and earnings per share as if CBIZ had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation
(in thousands, except per share data).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------
2004 2003 2004 2003
------- ------- ---------- ----------
Net income (loss) as reported... $ 356 $ (238) $ 14,319 $ 13,010
Fair value of stock-based
compensation, net of tax...... (358) (816) (1,065) (2,435)
------- ------- ---------- ----------
Pro forma net income (loss)..... $ (2) $(1,054) $ 13,254 $ 10,575
======= ======= ========== ==========
Earnings (loss) per share:
Basic - as reported......... $ 0.01 $ - $ 0.18 $ 0.14
Basic - pro forma........... $ - $ (0.01) $ 0.17 $ 0.11
Diluted - as reported....... $ 0.01 $ - $ 0.17 $ 0.14
Diluted - pro forma......... $ - $ (0.01) $ 0.16 $ 0.11
The above results may not be representative of the effects on net income
for future periods, as the level of forfeitures on existing grants and the
value and amount of new grants issued in future periods may vary.
New Accounting Pronouncements
Effective January 1, 2004, CBIZ adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51" ("FIN 46"), FASB Staff Position ("FSP") 46-e, "Effective Date of
Interpretation 46", and revisions to FIN 46 ("FIN 46(R)", "FIN 46(R)-1",
"FIN 46(R)-2", "FIN 46(R)-3", and "FIN 46(R)-4"). In accordance with the
provisions of the aforementioned standards, CBIZ has determined that its
relationship with certain Certified Public Accounting (CPA) firms with
whom we maintain administrative service agreements (ASAs), qualify as
variable interest entities. The accompanying financial statements do not
reflect the consolidation of the variable interest entities, as the impact
is not material to the financial condition, results of operations or cash
flows of CBIZ.
7
The CPA firms with which CBIZ maintains service agreements operate as
limited liability corporations, limited liability partnerships or
professional corporations. The firms are separate legal entities with
separate governing bodies and officers. CBIZ has no ownership interest in
any of these CPA firms, and neither the existence of the ASAs nor the
providing of services thereunder is intended to constitute control of the
CPA firms by CBIZ. CBIZ and the CPA firms maintain their own respective
liability and risk of loss in connection with performance of each of its
respective services, and CBIZ does not believe that its arrangements with
these CPA firms result in additional risk of loss. Refer to Item I of our
Annual Report on Form 10-K for the year ended December 31, 2003, for a
more detailed discussion of our relationship with these CPA firms.
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable balances were as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
Trade accounts receivable.............. $ 81,765 $ 80,649
Unbilled revenue....................... 39,680 36,886
-------- ---------
Total accounts receivable.............. 121,445 117,535
Less allowance for doubtful accounts... (9,329) (8,099)
-------- ---------
Accounts receivable, net............... $112,116 $ 109,436
======== =========
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of goodwill and other intangible assets, net were as
follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Goodwill......................................... $ 159,691 $ 157,815
Intangibles:
Client lists................................... 15,834 13,493
Other intangibles.............................. 891 682
--------- ---------
Total intangibles......................... 16,725 14,175
Total goodwill and other intangible assets....... 176,416 171,990
Less accumulated amortization.................... (5,492) (4,710)
--------- ---------
Total goodwill and other intangible assets, net.. $ 170,924 $ 167,280
========= =========
Client lists are amortized over periods not exceeding ten years. Other
intangibles, which consist primarily of non-compete agreements, are
amortized over periods ranging from two to ten years. Amortization expense
of client lists and other intangible assets was approximately $0.5 million
and $0.4 million for the three months ended September 30, 2004 and 2003
and $1.3 million and $1.1 million for the nine months ended September 30,
2004 and 2003, respectively.
8
4. BANK DEBT
Bank debt balances were as follows (in thousands, except percentages):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- --------------
Bank debt:
Revolving credit facility..... $ 52,500 $ 14,000
============= =============
Weighted average rates (1).... 3.38% 4.39%
============= =============
Range of effective rates (1).. 2.98% - 5.38% 3.08% - 5.58%
============= =============
(1) Rates are provided for the nine months ended September 30, 2004, and the
twelve months ended December 31, 2003, respectively.
Effective August 9, 2004, CBIZ modified its credit facility increasing the
total commitment from $73.0 million to $100.0 million, with an option to
increase to $125.0 million. The modified facility provides CBIZ additional
operating flexibility and funding to support seasonal working capital
needs and other strategic initiatives such as acquisitions and share
repurchases. The modified facility will also reduce the Company's
borrowing costs.
The credit facility is maintained with Bank of America as agent bank for a
group of five participating banks and has a five year term expiring August
2009. The credit facility is secured by substantially all assets and
capital stock of CBIZ and its subsidiaries. Management believes that the
carrying amount of bank debt approximates its fair value, and CBIZ had
approximately $43.6 million of available funds under the facility at
September 30, 2004.
Under the facility, loans are charged an interest rate consisting of a
base rate or Eurodollar rate plus an applicable margin. Additionally, a
commitment fee of 30 to 45 basis points is charged on the unused portion
of the facility. The borrowing base calculation required under the
previous facility is not required under the current facility.
The bank agreement contains financial covenants and restrictions which are
similar to those under the previous facility. Covenants 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 businesses,
repurchase CBIZ common stock and to divest operations. As of September 30,
2004, CBIZ is in compliance with its covenants.
The bank agreement also places restrictions on CBIZ's ability to create
liens or other encumbrances, to make certain payments, investments, loans
and guarantees and to sell or otherwise dispose of a substantial portion
of assets, or to merge or consolidate with an unaffiliated entity.
According to the terms of the agreement, CBIZ is not permitted to declare
or make any dividend payments, other than dividend payments made by one of
its wholly owned subsidiaries to the parent company. The agreement
contains a provision that, in the event of a defined change in control,
the agreement may be terminated.
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 $2.8 million and $3.2 million as of September 30,
2004, and December 31, 2003, respectively. CBIZ also acted as guarantor on
three letters of credit for a CPA firm with which it has an affiliation.
The letters of credit total $1.2 million and $0.7 million as of September
30, 2004, and December 31, 2003, respectively. In accordance with FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" and its amendments ("FIN 45-1" and "FIN 45-2"), CBIZ has
recognized a liability for the fair value of the obligations undertaken in
issuing these guarantees, which is recorded as other current liabilities
in the accompanying consolidated financial statements. Management does not
expect any material changes to result from these instruments as
performance is not expected to be required.
9
5. CONTINGENCIES
Since September 1999, seven purported stockholder class-action lawsuits
filed against CBIZ and certain of our current and former directors and
officers were consolidated as In Re Century Business Services Securities
Litigation, Case No.1:99CV2200, in the United States District Court for
the Northern District of Ohio. The plaintiffs alleged that the named
defendants violated certain provisions of the Securities Exchange Act of
1934 and certain rules promulgated thereunder in connection with certain
statements made during various periods from February, 1998, through
January, 2000, by, among other things, improperly amortizing goodwill and
failing to adequately monitor changes in operating results. The United
States District Court dismissed the matter with prejudice on June 27,
2002. The matter was appealed by the plaintiffs to the Sixth Circuit Court
of Appeals. On March 30, 2004, the Court of Appeals affirmed the dismissal
of the plaintiffs' complaint in its entirety. The Court also upheld the
lower court's denial of the plaintiffs' request for leave to amend their
complaint. CBIZ believes that further appeal is now time-barred and that
this matter is concluded.
The Company is a defendant in the case In Re Heritage Bond Litigation,
Case No. 02-ML-1475 DT (RCx), pending in the Central District of
California, as well as a related unconsolidated matter in which plaintiffs
allege numerous claims, including mismanagement and misappropriation of
funds from a bond financing, against unrelated parties, The Heritage Group
and its trustee, U.S. Trust. As part of these cases, the plaintiffs
brought an action against two CBIZ subsidiaries (CBIZ Valuation Group,
Inc. and CBIZ Accounting, Tax & Advisory, Inc.) alleging negligence and
negligent misrepresentation in connection with the provision of valuation
and feasibility study services to The Heritage Group. These claims have
been pending since 2001 and relate to services performed from 1996 through
2000. Plaintiffs in the class litigation have now attempted to join
Century Business Services, Inc. as a party defendant as well.
The Company has received from the plaintiffs reduced offers and demands to
settle these suits for approximately $7.0 million, an amount well in
excess of the net revenue of the subsidiaries. As a result of the failure
of the insurers of Century and its subsidiaries to completely cover the
cost of settlement and defense, Century has filed suit against its
carriers to determine its coverage rights. Although the ultimate
disposition of these proceedings are not presently determinable,
management continues to believe that the ultimate resolutions of these
matters will not have a material adverse effect on the financial
condition, results of operations or cash flows of CBIZ.
In addition to those items disclosed above, CBIZ is from time to time
subject to claims and suits arising in the ordinary course of business.
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.
10
6. CONSOLIDATION AND INTEGRATION CHARGES
In an effort to meet its strategy to deliver services to clients
conveniently, and to promote cross-serving between various practice
groups, CBIZ has initiated consolidation activities in several markets,
including a consolidation of the Dallas market during the first quarter of
2004. Consolidation and integration charges include non-cancelable lease
obligations, adjustments to lease accruals based on sublease assumptions,
severance obligations, and other costs such as moving costs. During the
nine months ended September 30, 2004, consolidation and integration
charges included $1.0 million related to real estate leasing costs in the
Chicago market. There were no significant charges related to consolidation
and integration activity during the nine months ended September 30, 2003.
Consolidation and integration reserve balances for leases as of December
31, 2003, and activity during the nine-month period ended September 30,
2004, was as follows (in thousands):
LEASE
CONSOLIDATION
-------------
Reserve balance at December 31, 2003....... $ 2,804
Amounts adjusted against income (1)........ 1,703
Payments................................... (1,822)
-------
Reserve balance at September 30, 2004...... $ 2,685
=======
(1) Amounts adjusted against income are included in operating expenses in the
accompanying consolidated statements of operations.
7. 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, except per share data).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
NUMERATOR:
Net income (loss).............................. $ 356 $ (238) $ 14,319 $ 13,010
DENOMINATOR:
BASIC
Weighted average common shares................. 77,311 86,228 80,200 92,118
-------- -------- -------- --------
DILUTED
Options........................................ 2,049 2,743 2,267 2,149
Restricted stock awards........................ 11 - 11 -
Contingent shares (1).......................... 2 - 2 -
-------- -------- -------- --------
Total diluted weighted average common shares... 79,373 88,971 82,480 94,267
-------- -------- -------- --------
Basic net income (loss) per share.............. $ 0.01 $ - $ 0.18 $ 0.14
======== ======== ======== ========
Diluted net income (loss) per share............ $ 0.01 $ - $ 0.17 $ 0.14
======== ======== ======== ========
(1) Contingent shares represent shares that will not be issued until future
conditions have been met.
11
8. ACQUISITIONS
During the nine months ended September 30, 2004, CBIZ completed the
acquisition of a benefits and insurance firm in Chicago, Illinois, an
accounting tax and advisory firm in Denver, Colorado, and a technology
firm in Cleveland, Ohio which is reported as part of our National
Practices - Other segment. Aggregate consideration for the acquisitions
consisted of approximately $2.9 million cash and 136,000 shares of
restricted common stock (estimated stock value of $0.6 million at
acquisition) paid at closing, and up to an additional $5.7 million
(payable in cash and stock) which is contingent on the businesses meeting
certain future revenue and earnings targets.
During the nine months ended September 30, 2003, CBIZ completed
acquisitions of benefits and insurance firms in Boca Raton, Florida, and
Salt Lake City, Utah, as well as the client lists of three benefits
agencies. CBIZ also completed acquisitions of accounting, tax and advisory
firms in Orange County, California and Stamford, Connecticut. The
aggregate purchase price of the acquisitions 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 operating results of these firms and client lists have been included
in the accompanying consolidated financial statements since the dates of
acquisition. Client lists and non-compete agreements were recorded at fair
value at the time of acquisition. The excess of purchase price over the
fair value of net assets acquired, client lists and non-compete agreements
was allocated to goodwill. Acquisitions, including contingent
consideration earned, resulted in increases to goodwill, client lists and
other intangible assets during the nine months ended September 30, 2004,
of $2.5 million, $2.9 million, and $0.2 million, respectively.
Acquisitions completed during the nine months ended September 30, 2003
resulted in increases to goodwill, client lists and other intangible
assets of $2.1 million, $3.9 million, and $0.1 million, respectively.
9. DIVESTITURES
During the first quarter of 2004, CBIZ sold a business unit and a client
list from the Accounting, Tax, and Advisory (ATA) practice group, for
aggregate proceeds of $0.5 million cash and $0.4 million notes receivable.
The sales resulted in a $0.4 million pretax gain, which is reported as
gain on sale of operations, net from continuing operations in the
consolidated financial statements. These sales did not satisfy the
criteria for treatment as discontinued businesses.
During the second quarter of 2004, CBIZ sold two client lists and related
assets within the ATA practice group, a client list and related assets
within the B&I practice group, and committed to the disposal of a business
unit within the National Practices practice group. The client lists and
related assets were sold for aggregate proceeds of $2.5 million cash, $0.7
million notes receivable, and CBIZ stock valued at $0.1 million, and
resulted in a $0.5 million pretax gain which is reported as gain on sale
of operations, net from continuing operations in the consolidated
financial statements. The National Practices business unit satisfied the
criteria for treatment as a discontinued business, and is classified as
such in the accompanying consolidated financial statements.
During the third quarter of 2004, CBIZ disposed of two operations within
the ATA practice group, through a sale and a closure, which qualify for
treatment as discontinued businesses and are classified as such in the
accompanying consolidated financial statements. CBIZ also sold a business
unit within the ATA practice group during the third quarter of 2004, which
did not qualify for treatment as a discontinued business. This sale
resulted in a pretax gain of $78,000 and is reported as gain on sale of
operations, net from continuing operations. Aggregate proceeds from the
third quarter sales were approximately $2.8 million, and consisted of $1.7
million cash and $1.1 million in notes receivable.
During the first quarter of 2003, there were no transactions related to
the sale of a business or client list, commitments to sell a business, or
classifications of a unit as a discontinued business. During the second
quarter of 2003, CBIZ sold two businesses within the B&I practice group
for aggregate proceeds of $4.2 million 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 ATA practice group for aggregate proceeds of
$0.8 million cash and
12
CBIZ stock valued at $0.1 million, resulting in a pretax gain of $0.2
million. These sales did not satisfy the criteria for treatment as
discontinued businesses, and the pretax gain is reported as gain on sale
of operations, net from continuing operations in the consolidated
financial statements.
10. SEGMENT DISCLOSURES
CBIZ's business units have been aggregated into three practice groups:
Accounting, Tax and Advisory Services, Benefits and Insurance and National
Practices. The business units have been aggregated based on the following
factors: similarity of the products and services; similarity of the
regulatory environment; the long-term performance of these units is
affected by similar economic conditions; and the business is managed along
these segment lines, which each report to a Practice Group Leader. The
medical practice management unit under the National Practices group
exceeds the quantitative threshold of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," prompting CBIZ to
disclose this reporting unit separately.
Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory
Services practice group offers services in the following areas: cash flow
management; strategic planning; consulting; record-keeping; federal, state
and local tax return preparation; tax planning based on financial and
investment alternatives; tax structuring of business transactions such as
mergers and acquisitions; quarterly and year-end payroll tax reporting;
corporate, partnership and fiduciary tax planning and return preparation;
outsourced chief financial officer services and other financial staffing
services; financial investment analysis; succession, retirement, and
estate planning; profitability, operational and efficiency enhancement
consulting to a number of specialized industries; internal audit services;
and Sarbanes-Oxley consulting and compliance services.
Benefits and Insurance Services. The Benefits and Insurance practice group
offers services in the following areas: employee benefits, brokerage,
consulting, and administration, including the design, implementation and
administration of qualified plans, such as 401(k) plans, profit-sharing
plans, defined benefit plans, and money purchase plans; actuarial
services; health and welfare benefits consulting, including group health
insurance plans; dental and vision care programs; group life insurance
programs; accidental death and dismemberment and disability programs;
COBRA administration and voluntary insurance programs; health care and
dependent care spending accounts; premium reimbursement plans;
communications services to inform and educate employees about their
benefit programs; executive benefits consulting on non-qualified
retirement plans and business continuation plans; specialty high-risk life
insurance; employee benefit worksite marketing; and wealth management
services, including Registered Investment Advisory Services, Investment
Policy Statements, also known as IPS, mutual fund selection based on IPS
and ongoing mutual fund monitoring.
National Practices. The National Practices group offers services in the
following areas: payroll processing and administration; valuations of
commercial, tangible, and intangible assets and financial securities;
mergers and acquisitions and capital advisory services, health care
consulting, government relations; process improvement; and technology
consulting, including strategic technology planning, project management,
development, network design and implementation and software selection and
implementation.
Medical Practice Management. CBIZ Medical Management Professionals (CBIZ
MMP), CBIZ's medical practice management subsidiary of the National
Practice group, offers services in the following areas: billing and
accounts receivable management; coding and automated claims filing;
comprehensive delinquent claims follow up and collections; compliance
plans to meet government and other third party regulations; local office
management; and comprehensive statistical and operational reporting;
financial reporting, accounts payable, payroll, general ledger processing;
design and implementation of managed care contracts with focus on
negotiation strategies, pricing, cost containment and utilization
tracking; review and negotiation of hospital contracts; evaluation of
other strategic business partners; identification and coordination of
practice manager and integration opportunities; and coordination of
practice expansion efforts.
Corporate and other charges represent costs at the corporate office that
are not allocated to the business units.
13
Segment information for the three and nine-month periods ended September
30, 2004 and 2003 were as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
------------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------- --------- --------- --------- --------- ---------
Revenue.................................... $ 45,144 $ 36,449 $ 22,262 $ 17,695 $ -- $ 121,550
Operating expenses......................... 42,529 31,143 17,929 16,132 2,144 109,877
--------- --------- --------- --------- --------- ---------
Gross margin........................ 2,615 5,306 4,333 1,563 (2,144) 11,673
Corporate general & administrative......... - - - - 6,841 6,841
Depreciation and
amortization............................... 967 788 688 208 1,454 4,105
--------- --------- --------- --------- --------- ---------
Operating income (loss)............. 1,648 4,518 3,645 1,355 (10,439) 727
Other income (expense):
Interest expense.................... (13) 74 - - (430) (369)
Gain on sale of operations, net..... - - - - 78 78
Other income (expense), net......... 74 366 3 (251) 335 527
--------- --------- --------- --------- --------- ---------
Total other income (expense), net... 61 440 3 (251) (17) 236
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes.......... $ 1,709 $ 4,958 $ 3,648 $ 1,104 $ (10,456) $ 963
========= ========= ========= ========= ========= =========
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..................................... $ 41,620 $ 37,363 $ 19,503 $ 18,910 $ -- $ 117,396
Operating expenses.......................... 41,796 30,846 15,362 17,839 1,551 107,394
--------- --------- --------- --------- --------- ---------
Gross margin........................... (176) 6,517 4,141 1,071 (1,551) 10,002
Corporate general & administrative.......... - - - - 4,940 4,940
Depreciation and amortization............... 929 757 676 271 1,462 4,095
--------- --------- --------- --------- --------- ---------
Operating income (loss)................ (1,105) 5,760 3,465 800 (7,953) 967
Other income (expense):
Interest expense....................... (13) (10) (1) - (210) (234)
Gain on sale of operations, net........ - - - - 207 207
Other income (expense), net............ 94 (91) (3) 136 316 452
--------- --------- --------- --------- --------- ---------
Total other income (expense), net.... 81 (101) (4) 136 313 425
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes............ $ (1,024) $ 5,659 $ 3,461 $ 936 $ (7,640) $ 1,392
========= ========= ========= ========= ======== =========
14
NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
--------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
--------- ---------- -------- -------- ---------- ---------
Revenue ..................................... $ 163,761 $113,381 $ 64,321 $ 53,052 $ -- $ 394,515
Operating expenses .......................... 136,199 95,309 53,040 47,735 8,334 340,617
--------- -------- -------- -------- -------- ---------
Gross margin .................... 27,562 18,072 11,281 5,317 (8,334) 53,898
Corporate general & administrative .......... - - - - 18,275 18,275
Depreciation and amortization ............... 2,819 2,320 2,025 624 4,428 12,216
--------- -------- -------- -------- -------- ---------
Operating income (loss) ......... 24,743 15,752 9,256 4,693 (31,037) 23,407
Other income (expense):
Interest expense ................ (31) 59 - - (1,066) (1,038)
Gain on sale of operations, net . - - - - 996 996
Other income (expense), net ..... 333 449 (5) 33 548 1,358
--------- -------- -------- -------- -------- ---------
Total other income (expense), net 302 508 (5) 33 478 1,316
--------- -------- -------- -------- -------- ---------
Income (loss) from continuing
operations before income taxes ........... $ 25,045 $ 16,260 $ 9,251 $ 4,726 $(30,559) $ 24,723
========= ======== ======== ======== ======== =========
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 ..................................... $ 158,578 $ 115,734 $ 55,764 $ 53,817 $ -- $ 383,893
Operating expenses .......................... 133,358 93,651 45,759 53,663 5,603 332,034
--------- --------- --------- --------- --------- ---------
Gross margin ........................... 25,220 22,083 10,005 154 (5,603) 51,859
Corporate general & administrative .......... - - - - 14,633 14,633
Depreciation and amortization ............... 3,383 2,241 1,923 849 4,257 12,653
--------- --------- --------- --------- --------- ---------
Operating income (loss) ................ 21,837 19,842 8,082 (695) (24,493) 24,573
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 ............ 227 (6) (94) 287 (972) (558)
--------- --------- --------- --------- --------- ---------
Total other income (expense), net ...... 187 (60) (96) 286 262 579
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes ............ $ 22,024 $ 19,782 $ 7,986 $ (409) $ (24,231) $ 25,152
========= ========= ========= ========= ========= =========
15
11. DISCONTINUED BUSINESSES
During 2003, CBIZ adopted formal plans to divest of five business
operations, all of which were sold or closed by December 31, 2003. During
the second quarter of 2004, CBIZ committed to the disposal of a business
unit within the National Practices practice group, which remains available
for sale at September 30, 2004. During the third quarter of 2004, CBIZ
sold a business unit within the ATA practice group, and closed a business
unit within the ATA practice group. These business operations are reported
as discontinued businesses and the net assets, net liabilities and results
of operations are reported separately in the consolidated financial
statements.
Revenue and loss from operations of discontinued businesses for the three
and nine months ended September 30, 2004 and 2003 were as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------------
2004 2003 2004 2003
------ ------- --------- --------
Revenue.................................... $ 888 $ 3,322 $ 3,312 $ 10,520
====== ======= ========= ========
Loss from operations of discontinued
businesses before income taxes........ (483) (538) (799) (875)
Income tax benefit.............. .......... (111) (186) (210) (281)
------ ------- --------- --------
Loss from operations of discontinued
businesses, net of tax................ $ (372) $ (352) $ (589) $ (594)
====== ======= ========= ========
The assets and liabilities of the business units classified as discontinued
operations consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Accounts receivable, net .................... $ 780 $2,272
Property and equipment, net ................. 163 444
Deferred income taxes, net .................. 59 312
Other assets ................................ 11 151
------ ------
Assets of businesses held for sale ....... $1,013 $3,179
====== ======
Accounts payable ............................ $ 219 $ 254
Other current liabilities ................... 233 559
Other non-current liabilities ............... - 13
------ ------
Liabilities of businesses held for sale .. $ 452 $ 826
====== ======
Gain (loss) on disposal of discontinued businesses for the three and nine months
ended September 30, 2004 and 2003 was:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2004 2003 2004 2003
----- ------ ----- -----
Gain (loss) on sale of discontinued
businesses, before tax ........... $ 561 $(326) $ 561 $(622)
Income tax expense (benefit) ......... 323 (116) 323 (229)
----- ----- ----- -----
Net gain (loss) on sale of
discontinued businesses .......... $ 238 $(210) $ 238 $(393)
===== ===== ===== =====
16
12. SUBSEQUENT EVENTS
In October 2004, CBIZ entered an agreement to acquire Gallery Asset
Management, Inc., to be effective January 1, 2005, subject to certain
conditions. Gallery Asset Management, Inc. is an Ohio-based registered
investment advisor, which will compliment the wealth management business.
CBIZ also acquired a benefits and insurance firm in Owing Mills, Maryland
and several client lists subsequent to September 30, 2004.
During the second quarter of 2004, CBIZ committed to the disposal of a
business unit within the National Practices practice group, which was
available for sale at September 30, 2004. Negotiations with the
prospective buyer have recently been terminated, due to the inability to
agree upon terms that were acceptable to both parties. As a result, the
business unit was shut down effective October 31, 2004.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless the context otherwise requires, references in this Form 10-Q to "we",
"our", "CBIZ", or the "Company" shall mean Century Business Services, Inc., a
Delaware corporation, and its operating subsidiaries.
The following discussion is intended to assist in the understanding of CBIZ's
financial position at September 30, 2004 and December 31, 2003, and results of
operations for the three and nine months ended September 30, 2004 and 2003 and
cash flows for the nine months ended September 30, 2004 and 2003, and should be
read in conjunction with our consolidated financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with
our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
EXECUTIVE SUMMARY
CBIZ is a diversified services company which, acting through its subsidiaries,
provides professional outsourced business services to businesses of various
sizes, as well as individuals, governmental entities and not-for-profit
enterprises throughout the United States and Toronto, Canada. CBIZ delivers
integrated services through three practice groups: Accounting, Tax and Advisory
(ATA); Benefits and Insurance (B&I); and National Practices.
CBIZ's business strategy is to grow in the professional outsourced business
services industry by:
- offering a wide array of infrastructure support services;
- cross-serving these services to our existing customer base;
- attracting new customers with our diverse business services
offerings;
- leveraging our practice area expertise across all our businesses;
and
- developing our core service offerings in target markets through
selective acquisitions.
CBIZ seeks to strengthen its operations and customer service capabilities by
making acquisitions in markets where it currently operates and where the
prospects are favorable to increase its market share and become a more
significant provider of a comprehensive range of outsourced business services.
During the nine months ended September 30, 2004, CBIZ acquired three businesses,
including a benefits and insurance firm in Chicago, Illinois, an accounting tax
and advisory firm in Denver, Colorado, and a technology firm in Cleveland, Ohio.
In October 2004 CBIZ entered into an agreement to acquire Gallery Asset
Management, Inc. to become effective January 1, 2005, subject to certain
conditions. Gallery Asset Management, Inc. is an Ohio-based registered
investment advisor, which will compliment our wealth management business. CBIZ
also acquired a benefits and insurance firm in Owing Mills, Maryland, and
several client lists subsequent to September 30, 2004. CBIZ will continue to
actively seek acquisitions in the future, and has hired an internal resource
devoted to driving this activity.
CBIZ continually evaluates its business operations, and may from time to time
sell or close operations that are underperforming, located in secondary markets,
or do not provide the level of synergistic cross-serving opportunities with
other CBIZ businesses that is desired. During the nine months ended September
30, 2004, CBIZ sold three business operations and three client lists within the
ATA practice group, and a client list and related assets within the B&I practice
group. Additionally, CBIZ closed a business unit in the ATA practice group and
committed to the disposal of a business unit within the National Practices
practice group, which was closed on October 31, 2004.
Due to seasonality in the ATA and B&I practices, a disproportionately large
amount of CBIZ's revenue occurs in the first half of the year. The ATA practice
(primarily accounting and tax services) experiences heavy volume in the first
four months of the year, and recognized 58.6% of its full year revenue for 2003
during the first six months of the year. The B&I practice experiences
seasonality with regards to the timing of supplemental bonuses from carriers,
which are typically recognized during the first half of the year. These higher
revenue levels are
18
supported by operating costs that are primarily fixed in nature, and thus result
in higher operating margins in the first half of the year.
CBIZ believes that repurchasing shares of its common stock is a use of cash that
provides value to stockholders, and accordingly completed a tender offer in
April 2004. The tender offer resulted in the purchase of approximately 7.5
million shares of common stock at a purchase price of $5.00 per share, or a
total cost of approximately $37.5 million. In addition, CBIZ completed open
market repurchases of approximately 1.8 million shares at a cost of
approximately $7.8 million through September 30, 2004. The credit facility and
net cash provided by CBIZ operations were utilized to fund the share
repurchases.
Effective August 9, 2004, CBIZ completed a modification of its credit facility.
The new facility has a total commitment amount of $100.0 million, and expires
August 2009. The modified credit facility is discussed in further detail in Note
4 to the accompanying consolidated financial statements.
ACCOUNTING, TAX AND ADVISORY (ATA) PRACTICE
A comprehensive description of the outsourced business services currently
offered by CBIZ through its three practice groups is included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003. Following is a
further description of the services provided through our Accounting, Tax and
Advisory (ATA) practice group.
The ATA practice group does not offer audit and attest services, but it does
maintain joint-referral relationships with independent licensed CPA firms. These
firms are owned by licensed CPAs who are employed by CBIZ subsidiaries, and
provide audit and attest services to clients including CBIZ's clients. Under our
service agreements with these firms, we provide administrative services, office
space and staff in exchange for a fee. Revenue from these agreements is
reflected in our financial statements and amounts to approximately $11.8 million
and $42.0 million for the three and nine months ended September 30, 2004,
respectively, a majority of which is related to services rendered to
privately-held clients. With respect to CPA firm clients that are required to
file audited financial statements with the SEC, the SEC staff views CBIZ and the
CPA firms with which we have contractual relationships as a single entity in
applying independence rules established by the accountancy regulators and the
SEC. Accordingly, we do not hold any financial interest in an SEC-reporting
attest client of an associated CPA firm, enter into any business relationship
with an SEC-reporting attest client that the CPA firm performing an audit could
not maintain, or sell any non-audit services to an SEC-reporting attest client
that the CPA firm performing an audit could not maintain, under the auditor
independence limitations set out in the Sarbanes-Oxley Act of 2002 and other
professional accountancy independence standards. Applicable professional
standards generally permit the ATA practice group to provide additional services
to privately-held companies, in addition to those services which may be provided
to SEC-reporting attest clients of an associated CPA firm. CBIZ and the CPA
firms with which we are associated have implemented policies and procedures
designed to enable us to maintain independence and freedom from conflicts of
interest in accordance with applicable standards. Given the pre-existing limits
set by CBIZ on its relationships with SEC-reporting attest clients of associated
CPA firms, and the limited number and size of such clients, the imposition of
Sarbanes-Oxley Act independence limitations did not and is not expected to
materially affect CBIZ revenues.
19
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
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.
2004 2003 CHANGE
--------- ---------- ---------
Revenue
Same-Unit $ 43,695 $ 41,321 $ 2,374
Acquired Businesses 1,449 - 1,449
Divested Businesses - 299 (299)
-------- -------- --------
Total Revenue $ 45,144 $ 41,620 $ 3,524
Percent of Total CBIZ
Revenue 37.1% 35.5%
Operating Expenses 42,529 41,796 733
-------- -------- --------
Gross Margin $ 2,615 $ (176) $ 2,791
======== ======== ========
Gross Margin Percent 5.8% (0.4%) 6.2%
For ATA businesses with comparable periods of operations (same-unit) for the
three months ended September 30, 2004 and 2003, revenue grew 5.7%. The growth
experienced in same-unit revenue was primarily the result of an increase in the
aggregate number of hours charged to clients in our litigation support and
Sarbanes-Oxley related services. Hourly rates charged to clients have increased
slightly from a year ago, and client profitability has remained consistent. The
utilization of professionals has improved, as the number of hours charged to
clients has increased, while the number of available professionals has decreased
from a year ago. The growth in revenue attributable to acquisitions was
primarily from Sarbanes-Oxley consulting services provided by CBIZ HarborView,
which was acquired in September 2003.
The largest components of operating expenses for the ATA group are personnel
costs, occupancy costs and professional service fees paid to third parties,
representing 89.5% and 87.3% of total operating expenses for the three months
ended September 30, 2004 and 2003, respectively. As a percentage of revenue,
personnel costs were 73.5% and 78.1% and occupancy costs were 8.0% and 8.9%, for
the three months ended September 30, 2004 and 2003, respectively. These costs
are relatively fixed in nature, thus resulting in an improvement to gross margin
with the growth in revenue. Professional service fees paid to third parties
increased to 2.9% percent of revenue for the three months ended September 30,
2004 from 0.6% for the same period a year ago, as the result of outsourced
professional services utilized at CBIZ HarborView for Sarbanes-Oxley consulting
services, and at a unit that delivers services requiring specialization in state
agency compliance.
20
BENEFITS AND INSURANCE SERVICES.
2004 2003 CHANGE
-------- -------- ---------
Revenue
Same-Unit $36,299 $37,363 $(1,064)
Acquired Businesses 150 - 150
Divested Businesses - - -
------- ------- -------
Total Revenue $36,449 $37,363 $ (914)
Percent of Total CBIZ
Revenue 30.0% 31.8%
Operating Expenses 31,143 30,846 297
------- ------- -------
Gross Margin $ 5,306 $ 6,517 $(1,211)
======= ======= =======
Gross Margin Percent 14.6% 17.4% (2.8%)
On a same-unit basis, the B&I group experienced a decline in revenue of 2.9%
during the three months ended September 30, 2004 from the same period a year
ago. The decline in revenue is primarily attributable to one national business
unit that has experienced lower enrollments compared with a year ago, and
revenue adjustments resulting from higher policy terminations than originally
estimated. This unit has experienced significant growth over the last three
years, which has resulted in system, client service and other operational
challenges. CBIZ has allocated resources to support the current level of revenue
and future growth, and is in the process of implementing new systems, including
a new client service interface. The decline in revenue, combined with higher
expenses to support growth by this unit has also resulted in a decrease in gross
margin of approximately $1.5 million for the third quarter compared with a year
ago.
Excluding the impact of the national business described above, the B&I group
experienced growth in same unit revenue of 2.6% for the three months ended
September 30, 2004 over the same period a year ago. Of this growth,
approximately 1.7% is attributable to our group health business, which has
experienced growth primarily as a result of an increase in the number of
policies sold over a year ago. A majority of the 0.9% growth experienced by our
national businesses was due to growth in our specialty life insurance business.
The largest components of operating costs for the B&I group are personnel costs,
commissions paid to third party brokers, and occupancy costs, representing 84.5%
and 83.1% of total operating expenses for the three months ended September 30,
2004 and 2003, respectively. For the three months ended September 30, 2004,
personnel costs increased as a percentage of revenue to 58.6% from 54.7% for the
three months ended September 30, 2003, primarily as a result of investments in
sales and support personnel intended to promote organic growth during the year.
Commissions paid to third party brokers are directly related to revenue, and
have remained relatively unchanged as a percentage of revenue at 7.7% and 7.6%
for the three months ended September 30, 2004 and 2003, respectively. Occupancy
expenses are relatively fixed in nature and have declined as a percent of
revenue to 5.9% for the three months ended September 30, 2004 from 6.3% for the
three months ended September 30, 2003, despite the decline in revenue. This
improvement is the result of cost savings realized from office consolidations
and integration activities that have occurred during the year.
21
NATIONAL PRACTICES SERVICES. The National Practices group contributed
approximately $40.0 million and $38.4 million of revenue, or approximately 32.9%
and 32.7% of CBIZ's total revenue for the quarters ended September 30, 2004 and
2003, respectively.
CBIZ Medical Management Professionals (CBIZ MMP).
2004 2003 CHANGE
-------- -------- ---------
Revenue
Same-Unit $22,262 $19,503 $ 2,759
Acquired Businesses - - -
Divested Businesses - - -
------- ------- -------
Total Revenue $22,262 $19,503 $ 2,759
Percent of Total CBIZ
Revenue 18.3% 16.6%
Operating Expenses 17,929 15,362 2,567
------- ------- -------
Gross Margin $ 4,333 $ 4,141 $ 192
======= ======= =======
Gross Margin Percent 19.5% 21.2% (1.7%)
CBIZ MMP's revenue growth of 14.2% is primarily attributable to the addition of
new clients obtained since the third quarter of 2003. The largest components of
operating expenses for CBIZ MMP are personnel costs, occupancy costs and office
expenses (primarily postage), representing 89.4% and 90.6% of total operating
expenses for the three months ended September 30, 2004 and 2003, respectively.
Gross margin has declined in the third quarter of 2004 from a year ago,
primarily as a result of investments made in additional staff to support and
facilitate growth. As a percent of revenue, personnel costs have increased to
58.1% from 55.6% for the three months ended September 30, 2004 and 2003,
respectively.
National Practice Services - Other.
2004 2003 CHANGE
--------- --------- ---------
Revenue
Same-Unit $ 16,984 $ 18,344 $ (1,360)
Acquired Businesses 711 - 711
Divested Businesses - 566 (566)
-------- -------- --------
Total Revenue $ 17,695 $ 18,910 $ (1,215)
Percent of Total CBIZ
Revenue 14.6% 16.1%
Operating Expenses 16,132 17,839 (1,707)
-------- -------- --------
Gross Margin $ 1,563 $ 1,071 $ 492
======== ======== ========
Gross Margin Percent 8.8% 5.7% 3.1%
On a same-unit basis, the National Practices group, excluding CBIZ MMP,
experienced lower revenue than the same quarter a year ago, primarily due to
lower revenues in the technology and property tax businesses. Revenue generated
from our data storage business declined in the third quarter of 2004 due to the
discontinuance of a product line that did not generate the gross margin desired.
The property tax business revenue declined in the third quarter 2004 as compared
to 2003 primarily due fewer clients receiving fixed fee services. Revenue from
acquisitions relates to a technology firm that was purchased in June 2004. The
decline in revenue related to divestitures relates to the closure of
unprofitable locations in the property tax and technology businesses during
2003.
22
The major components of operating expenses for the National Practices group
include product, personnel, and occupancy costs, representing 87.1% and 84.8% of
total operating expenses for the three months ended September 30, 2004 and 2003,
respectively. Product costs have declined as a percentage of revenue to 9.7%
from 11.1%, driven primarily by the discontinued product line discussed above.
Personnel and occupancy costs have increased as a percentage of revenue to 62.6%
from 62.2% and to 7.1% from 6.7% for the three months ended September 30, 2004
and 2003, respectively. Based upon the fixed nature of these costs, the
increases were driven primarily by the decline in revenue. The increase in
personnel costs as a percent of revenue is not directly proportional to the
decline in revenue due to staff reductions that occurred with the business
closures described above.
The improvement in gross margin for the three months ended September 30, 2004
from the three months ended September 30, 2003 was realized as the result of
closing unprofitable locations in the property tax and technology businesses and
discontinuing unprofitable product lines, combined with improvements and
operational efficiencies in the payroll, technology and valuation businesses.
Revenue
Total revenue for the three months ended September 30, 2004 was $121.6 million
as compared to $117.4 million for the three months ended September 30, 2003,
representing an increase of $4.2 million, or 3.5%. The increase in revenue
attributable to acquisitions completed subsequent to September 30, 2003 was $2.3
million, and was offset by a decrease in revenue of $0.8 million due to
divestitures completed subsequent to September 30, 2003. For business units with
comparable periods of operations for the three months ended September 30, 2004
and 2003, revenue increased $2.7 million or 2.3%. A more comprehensive analysis
of revenues by practice group is discussed above.
Operating Expenses
Operating expenses increased to $109.9 million for the three-month period ended
September 30, 2004, from $107.4 million for the comparable period in 2003, an
increase of $2.5 million or 2.3%. As a percent of revenue, operating expenses
(excluding consolidation and integration charges) were 89.4% and 90.7% for the
three months ended September 30, 2004 and 2003, respectively. The primary
components of operating expenses are personnel costs and occupancy expense,
representing 79.7% and 79.2% of total operating expenses and 72.1% and 72.5% of
revenue for the three months ended September 30, 2004 and 2003, respectively. A
more comprehensive analysis of operating expenses (excluding consolidation and
integration charges) and their impact on gross margin is discussed by operating
practice group, above.
Consolidation and integration charges are reported as operating expenses in the
accompanying consolidated financial statements, and increased as a percent of
revenue to 1.0% from 0.8% for the three months ended September 30, 2004 and
2003, respectively. The increase in consolidation and integration charges was
due primarily to real estate leasing costs in the Chicago market during the
third quarter of 2004.
Corporate general and administrative expenses increased to $6.8 million for the
three-month period ended September 30, 2004, from $4.9 million for the
comparable period in 2003. Corporate general and administrative expenses
represented 5.6%, and 4.2% of total revenues for the three-month periods ended
September 30, 2004 and 2003, respectively. The increase in corporate general and
administrative expenses as a percent of revenues is primarily the result of
legal fees, settlements (net of recoveries), and litigation reserves incurred to
address several long-standing litigation issues, and expenses associated with
the Company's compliance efforts in connection with Section 404 of the
Sarbanes-Oxley Act.
Depreciation and amortization expense was $4.1 million for the three-month
periods ended September 30, 2004, and 2003 respectively. As a percentage of
total revenue, depreciation and amortization expense was 3.4% for the
three-month period ended September 30, 2004, compared to 3.5% for the comparable
period in 2003.
Interest expense increased to $0.4 million for the three-month period ended
September 30, 2004, from $0.2 million for the comparable period in 2003, an
increase of $0.2 million, or 57.7%. The increase is the result of higher average
debt and interest rates during the third quarter of 2004, of $45.5 million and
3.5%, compared to $21.6 million and 3.3% during the third quarter of 2003.
Higher debt in the third quarter of 2004 is due primarily to share repurchase
activity, and is further described under "Liquidity and Capital Resources".
23
Gain on sale of operations, net was $78,000 for the three months ended September
30, 2004, and was related to the sale of a business in the ATA practice group.
For the three months ended September 30, 2003, gain on sale of operations, net
was $207,000 and related primarily to the sale of two operations in the ATA
practice group. See Note 9 to the accompanying consolidated financial statement
for further discussion.
CBIZ reported other income of $0.5 million for the three-month periods ended
September 30, 2004, and 2003. Other income (expense), net is comprised primarily
of interest income earned on funds held for clients at CBIZ's payroll business,
income earned on assets held in a rabbi trust related to the deferred
compensation plan implemented in the first quarter of 2004, gains and losses on
sale of assets, and miscellaneous income such as contingent royalties from
previous divestitures.
CBIZ recorded income tax expense from continuing operations of $0.5 million and
$1.1 million for the three-month periods ended September 30, 2004 and 2003,
respectively. The effective tax rate for the three month period ended September
30, 2004 was 49.1%. The effective tax rate for the quarter ended September 30,
2004 was higher than the effective tax rate as applied to year to date income
(40.7%) primarily due to permanent differences, such as non-deductible goodwill
related to the sale of a business operation in the third quarter. Income taxes
were adjusted in the third quarter of 2003 based on an annual effective tax rate
of 44.4%. The annual effective tax rate for 2003 was higher than the statutory
federal and state tax rates due to capital losses resulting from certain
impairment charges that were not offset by capital gains and therefore were not
deductible and were not expected to be deductible in future periods.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
ACCOUNTING, TAX AND ADVISORY SERVICES.
2004 2003 CHANGE
--------- --------- ---------
Revenue
Same-Unit $158,832 $156,682 $ 2,150
Acquired Businesses 4,929 - 4,929
Divested Businesses - 1,896 (1,896)
-------- -------- --------
Total Revenue $163,761 $158,578 $ 5,183
Percent of Total CBIZ
Revenue 41.5% 41.3%
Operating Expenses 136,199 133,358 2,841
-------- -------- --------
Gross Margin $ 27,562 $ 25,220 $ 2,342
======== ======== ========
Gross Margin Percent 16.8% 15.9% 0.9%
On a same-unit basis, the ATA group experienced growth of 1.4% during the nine
months ended September 30, 2004 compared to a year ago. The growth experienced
in same-unit revenue was primarily the result of an increase in the aggregate
number of hours charged to clients in our litigation support and Sarbanes-Oxley
related services. Hourly rates charged to clients have increased slightly over
last year, and client profitability has remained consistent. The utilization of
professionals has improved, as the number of hours charged to clients has
increased, while the number of available professionals has decreased from a year
ago. The growth in revenue attributable to acquisitions was primarily from
Sarbanes-Oxley consulting services provided by CBIZ HarborView, which was
acquired in September 2003.
The largest components of operating expenses for the ATA group are personnel
costs, occupancy costs and professional service fees paid to third parties,
representing 88.5% and 88.0% of total operating expenses for the nine months
ended September 30, 2004 and 2003, respectively. As a percentage of revenue,
personnel costs were 64.9% and 66.6% and occupancy costs were 6.7% and 6.8%, for
the nine months ended September 30, 2004 and 2003, respectively. These costs are
relatively fixed in nature, thus resulting in an improvement to gross margin
with the growth in revenue. Professional service fees paid to third parties
increased to 2.0% percent of revenue for the nine months ended September 30,
2004 from 0.6% for the same period a year ago, as the result
24
of outsourced professional services utilized at CBIZ HarborView for
Sarbanes-Oxley consulting services, and at a unit that delivers services
requiring specialization in state agency compliance.
BENEFITS AND INSURANCE SERVICES.
2004 2003 CHANGE
--------- --------- ----------
Revenue
Same-Unit $111,861 $110,279 $ 1,582
Acquired Businesses 1,520 - 1,520
Divested Businesses - 5,455 (5,455)
-------- -------- --------
Total Revenue $113,381 $115,734 $ (2,353)
Percent of Total CBIZ
Revenue 28.7% 30.2%
Operating Expenses 95,309 93,651 1,658
-------- -------- --------
Gross Margin $ 18,072 $ 22,083 $ (4,011)
======== ======== ========
Gross Margin Percent 15.9% 19.1% (3.2%)
On a same-unit basis, the B&I group experienced an increase in revenue of 1.4%
during the nine months ended September 30, 2004 compared to the same period a
year ago. This growth is primarily attributable to our group health business
which has experienced an increase in the number of policies sold in the first
nine months of 2004 compared with a year ago. We have also experienced growth in
our specialty life insurance business, which was offset by a decline in revenue
in a business unit that is described below.
The increase in revenue from acquired businesses pertains to business units
providing primarily group benefits and property and casualty services in the
Chicago, Salt Lake City, Maryland and southern Florida markets. The decline in
revenue from divestitures relates to Health Administration Services, which was
sold in May 2003.
The largest components of operating costs for the B&I group are personnel costs,
commissions paid to third party brokers, and occupancy costs, representing 85.8%
and 84.6% of total operating expenses for the nine months ended September 30,
2004 and 2003, respectively. For the nine months ended September 30, 2004,
personnel costs increased as a percentage of revenue to 58.0% from 56.0% for the
nine months ended September 30, 2003, primarily as a result of investments in
sales and support personnel intended to promote organic growth during the year.
CBIZ expects the investments in sales personnel to result in margin improvement
in future periods, once they have had time to establish their production
levels. Commissions paid to third party brokers have increased to 8.0% from 6.4%
for the nine months ended September 30, 2004 and 2003, respectively, primarily
due to a higher portion of revenue being generated with third party brokers
during the current year than a year ago. Occupancy expenses are relatively fixed
in nature and have declined as a percent of revenue to 6.1% for the nine months
ended September 30, 2004 from 6.2% for the nine months ended September 30, 2003,
despite the decline in revenue. This improvement is the result of cost savings
realized from office consolidations and integration activities that have
occurred during the year.
Gross margin has decreased compared to a year ago, primarily as the result of
one national business unit that has experienced lower enrollments compared with
a year ago, and revenue adjustments resulting from higher policy terminations
than originally estimated. This unit has experienced significant growth over the
last three years, which has resulted in system, client service and other
operational challenges. CBIZ has allocated resources to support the current
level of revenue and future growth, and is in the process of implementing new
systems, including a new client service interface. The decline in revenue,
combined with higher expenses to support growth in this unit have resulted in a
negative impact on gross margin of approximately $4.1 million for the first nine
months of 2004, compared with a year ago.
25
NATIONAL PRACTICES SERVICES. The National Practices group contributed
approximately $117.4 million and $109.6 million of revenue, or approximately
29.8% and 28.5% of CBIZ's total revenue for the nine months ended September 30,
2004 and 2003, respectively.
CBIZ Medical Management Professionals (CBIZ MMP).
2004 2003 CHANGE
-------- -------- ---------
Revenue
Same-Unit $64,321 $55,764 $ 8,557
Acquired Businesses - - -
Divested Businesses - - -
------- ------- -------
Total Revenue $64,321 $55,764 $ 8,557
Percent of Total CBIZ
Revenue 16.3% 14.5%
Operating Expenses 53,040 45,759 7,281
------- ------- -------
Gross Margin $11,281 $10,005 $ 1,276
======= ======= =======
Gross Margin Percent 17.5% 17.9% (0.4%)
CBIZ MMP's revenue growth of 15.3% is primarily attributable to the addition of
new clients obtained in the first nine months of 2004. The revenue growth is
also attributable to the maturation of clients that were obtained in 2003 and
strong existing client sales. The largest components of operating expenses for
CBIZ MMP are personnel costs, occupancy costs and office expenses (primarily
postage), representing 89.2% and 90.2% of total operating expenses for the nine
months ended September 30, 2004 and 2003, respectively. Gross margin has
declined for the nine months ended September 30, 2004 from the comparable
period a year ago, primarily as a result of investments made in additional staff
to support and facilitate growth. As a percentage of revenue, personnel costs
have increased to 59.1% from 58.2% for the nine months ended September 30, 2004
and 2003, respectively.
National Practice Services - Other.
2004 2003 CHANGE
--------- --------- ---------
Revenue
Same-Unit $ 52,047 $ 51,433 $ 614
Acquired Businesses 1,005 - 1,005
Divested Businesses - 2,384 (2,384)
-------- -------- --------
Total Revenue $ 53,052 $ 53,817 $ (765)
Percent of Total CBIZ
Revenue 13.5% 14.0%
Operating Expenses 47,735 53,663 (5,928)
-------- -------- --------
Gross Margin $ 5,317 $ 154 $ 5,163
======== ======== ========
Gross Margin Percent 10.0% 0.3% 9.7%
On a same-unit basis, the National Practices group, excluding CBIZ MMP,
experienced growth in revenue of 1.2% for the nine months ended September 30,
2004 over the same period in 2003. Approximately $2.4 million of the same-unit
revenue increase was attributable to four merger and acquisition transactions
that closed during the first six months of 2004, which was offset by lower
revenues in CBIZ's technology, health care consulting and
26
valuation businesses during the nine months ended September 30, 2004. Revenue
from acquisitions relates to a technology firm that was purchased in June 2004.
The decline in revenue related to divestitures relates to the closure of
unprofitable locations in the property tax and technology businesses during
2003.
The major components of operating expenses for the national practices group
include product, personnel, and occupancy costs, representing 86.9% and 85.3% of
total operating expenses for the nine months ended September 30, 2004 and 2003,
respectively. These costs have decreased as a percentage of revenue as follows:
product costs to 7.5% from 9.0%, personnel costs to 63.8% from 68.8% and
occupancy costs to 6.9% from 7.2% for the nine months ended September 30, 2004
and 2003, respectively.
The improvement in gross margin for the nine months ended September 30, 2004
from the nine months ended September 30, 2003 was realized as the result of
closing unprofitable locations within the property tax and technology
businesses, and discontinuing product lines in the technology business that did
not generate desirable margins, combined with improvements and operational
efficiencies in the payroll, technology and valuation businesses.
Revenue
Total revenue for the nine months ended September 30, 2004 was $394.5 million as
compared to $383.9 million for the nine months ended September 30, 2003,
representing an increase of $10.6 million, or 2.8%. The increase in revenue
attributable to acquisitions completed subsequent to September 30, 2003 was $7.4
million, and was offset by a decrease in revenue of $9.7 million due to
divestitures completed subsequent to September 30, 2003. For business units with
comparable periods of operations for the nine months ended September 30, 2004
and 2003, revenue increased $12.9 million or 3.4%. A more comprehensive analysis
of revenues by each operating practice group is discussed above.
Expenses
Operating expenses increased to $340.6 million for the nine-month period ended
September 30, 2004, from $332.0 million for the comparable period in 2003, an
increase of $8.6 million or 2.6%. As a percent of revenue, operating expenses
(excluding consolidation and integration charges) were 85.8% and 86.1% for the
nine months ended September 30, 2004 and 2003, respectively. The primary
components of operating expenses are personnel costs and occupancy expense,
representing 80.6% and 81.0% of total operating expenses and 69.6% and 70.1% of
revenue for the nine months ended September 30, 2004 and 2003, respectively. A
more comprehensive analysis of operating expenses (excluding consolidation and
integration charges) and their impact on gross margin is discussed by operating
practice group, above.
Consolidation and integration charges are reported as operating expenses in the
accompanying consolidated financial statements, and increased as a percent of
revenue to 0.6% from 0.4% for the nine months ended September 30, 2004 and 2003,
respectively. The increase in consolidation and integration charges was due
primarily to real estate leasing costs in the Chicago market in the third
quarter, and an adjustment to our estimated noncancellable lease obligations in
the second quarter of 2004.
Corporate general and administrative expenses increased to $18.3 million for the
nine-month period ended September 30, 2004, from $14.6 million for the
comparable period in 2003. Corporate general and administrative expenses
represented 4.6%, and 3.8% of total revenues for the nine-month periods ended
September 30, 2004 and 2003, respectively. The increase in corporate general and
administrative expenses as a percent of revenues is primarily the result of
legal fees, settlements (net of recoveries), and litigation reserves incurred to
address several long-standing litigation issues, and expenses associated with
the Company's compliance efforts in connection with Section 404 of the
Sarbanes-Oxley Act.
Depreciation and amortization expense decreased to $12.2 million for the
nine-month period ended September 30, 2004, from $12.7 million for the
comparable period in 2003, a decrease of $0.4 million, or 3.5%. The decrease is
primarily attributable to 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, and
total $1.8 million for the nine months ended September 30, 2004 and $1.1 million
for the nine months ended September 30, 2003. As a percentage of total revenue,
depreciation and amortization expense was 3.1% for the nine-month period ended
September 30, 2004, compared to 3.3% for the comparable period in 2003.
27
Interest expense increased to $1.0 million for the nine-month period ended
September 30, 2004, from $0.9 million for the comparable period in 2003, an
increase of $0.1 million, or 21.5%. The increase is the result of higher average
debt during the nine months ended September 30, 2004, of $37.6 million, compared
to $17.2 million during the nine months ended September 30, 2003. Higher debt
during the first three quarters of 2004 is primarily due to share repurchase
activity and is further described under "Liquidity and Capital Resources". The
increase in interest expense due to higher average debt balances was offset by a
decrease in average interest rates to 3.4% for the nine months ended September
30, 2004 from 4.7% for the nine months ended September 30, 2003. Additionally,
interest expense for nine months ended September 30, 2003 included fees related
to an interest rate swap that was terminated during the second quarter of 2003.
Gain on sale of operations, net was $1.0 million for the nine months ended
September 30, 2004, and was related to the sale of two operations and three
client lists in the ATA practice group, and a client list in the B&I practice
group. For the nine months ended September 30, 2003, gain on sale of operations,
net was $2.0 million and related primarily to the sale of Health Administrative
Services (HAS) from the B&I practice group. Three businesses from the ATA
practice group were also sold during the nine months ended September 30, 2003.
See Note 9 to the accompanying consolidated financial statement for further
discussion.
CBIZ reported other income of $1.4 million for the nine-month period ended
September 30, 2004, compared to other expense of $0.5 million for the comparable
period in 2003, an increase $1.9 million. Other income (expense), net is
comprised primarily of interest income earned on funds held for clients at
CBIZ's payroll business, income earned on assets held in a rabbi trust related
to the deferred compensation plan implemented in the first quarter of 2004,
gains and losses on sale of assets, and miscellaneous income such as contingent
royalties from previous divestitures. The change in other income (expense) for
the nine months ended September 30, 2004 from the nine months ended September
30, 2003 is primarily related to $2.0 million of impairment charges to notes
receivable during the nine months ended September 30, 2003 that did not recur in
2004.
CBIZ recorded income taxes from continuing operations of $10.1 million for the
nine months ended September 30, 2004, compared to $11.2 million for the nine
months ended September 30, 2003. The effective tax rate decreased to 40.7% for
the nine-month period ended September 30, 2004, from 44.4% for the comparable
period in 2003. The effective tax rate for the nine months ended September 30,
2004 is in line with statutory federal and state tax rates of approximately
40.0%. The effective tax rate for the nine months ended September 30, 2003 was
higher than the statutory federal and state tax rates of approximately 40.0%,
primarily due to capital losses resulting from certain impairment charges that
were not offset by capital gains and were not deductible in the period.
RESULTS OF OPERATIONS - DISCONTINUED BUSINESSES
During the third quarter of 2004, CBIZ divested two business units within the
ATA practice group, through a sale and a closure. During the second quarter of
2004, CBIZ adopted a formal plan to divest of a firm in the National Practices
practice group, which remains available for sale at September 30, 2004. There
were no plans to divest of operations adopted during the first quarter of 2004,
and there were no operations available for sale at March 31, 2004.
During 2003, CBIZ adopted formal plans to divest of five non-core operations
which were no longer part of CBIZ's strategic long-term growth objectives. At
December 31, 2003, all operations classified as discontinued operations had been
sold or were in the process of being closed, and there were no operations
available for sale.
These operations have been classified as discontinued businesses 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 net
assets, liabilities, and results of operations are reported separately in the
consolidated financial statements. Based upon the sales proceeds and cost of
closure, CBIZ recorded a gain (loss) on disposal of discontinued businesses, net
of tax, of $0.2 million, and ($0.2) million for the three months ended and $0.2
million and ($0.4) million for the nine months ended September 30, 2004, and
2003, respectively.
Revenue associated with discontinued businesses for the three and nine-month
periods ended September 30, 2004 were $0.9 million and $3.3 million, and losses
from operations, net of tax were $0.4 million and $0.6 million, respectively.
Revenue associated with discontinued businesses for the three and nine-month
periods ended September 30, 2003 were $3.3 million and $10.5 million, and losses
from operations, net of tax were $0.4 million and $0.6 million, respectively.
28
FINANCIAL CONDITION
Total assets were $420.6 million, total liabilities were $171.5 million and
shareholders equity was $249.1 million as of September 30, 2004. Current assets
of $193.2 million exceeded current liabilities of $112.8 million by $80.4
million.
Cash and cash equivalents increased $0.2 million to $4.0 million for the quarter
ended September 30, 2004. Restricted cash was $13.8 million at September 30,
2004, an increase of $2.9 million from December 31, 2003. 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. Cash and restricted cash fluctuate during the year based on the timing
of cash receipts and related payments.
Accounts receivable, net were $112.1 million at September 30, 2004, an increase
of $2.7 million from December 31, 2003. The increase in accounts receivable is
attributed to the increase in revenue from internal growth and acquisitions.
Days sales outstanding (DSO), from continuing operations, which are calculated
based on gross accounts receivable balance at the end of the period divided by
daily revenue, decreased from 81 days at December 31, 2003 to 78 days at
September 30, 2004. CBIZ provides DSO data because such data is commonly used as
a performance measure by analysts and investors and as a measure of the
Company's ability to collect on receivables in a timely manner.
Goodwill and other intangible assets, net of accumulated amortization, increased
$3.6 million from December 31, 2003. Acquisitions, including contingent
consideration earned, resulted in a $5.6 million increase in intangibles in the
first three quarters of 2004. In addition, intangibles decreased by $2.0 million
as a result of divestitures completed during the nine months ended September 30,
2004, and amortization expense for client lists and other intangibles.
Other current assets increased $1.4 million due to the timing of prepaid assets.
CBIZ prepays insurance and software maintenance costs in the first quarter, and
amortizes them over twelve months. Other assets (non-current) increased $4.1
million, primarily due to assets held in a rabbi trust in connection with the
deferred compensation plan that was implemented during the first quarter of
2004. These assets are directly offset by liabilities which are recorded as
other non-current liabilities in the accompanying consolidated financial
statements.
As further described in Note 1 to the accompanying consolidated financial
statements, funds held for clients are directly offset by client fund
obligations. Funds held for clients fluctuate during the year based on the
timing of cash receipts and related payments.
The accounts payable balance of $28.1 million at September 30, 2004 reflects
amounts due to suppliers and vendors; balances fluctuate during the year based
on the timing of cash payments. Other current liabilities increased $0.7 million
to $34.9 million at September 30, 2004, primarily as the result of an increase
in legal reserves (see description of legal expenses under the corporate general
and administrative expense discussion above), contingent consideration earned in
connection with various acquisitions, and capitalized furniture and equipment
leases in connection with consolidation activities in Kansas City. These
increases were offset by a decrease in our accrual for lease terminations
(including consolidation and integration reserve). This reserve decreased
despite charges described under operating expenses above, as the result of lease
payments made during the nine months ended September 30, 2004. The increase in
income taxes payable to $1.3 million at September 30, 2004, from income taxes
recoverable of $0.4 million at December 31, 2003, is due to tax refunds received
in fiscal 2003 that are not expected to recur in 2004. Client fund obligations
of $48.0 million were directly related to funds held for clients in the same
amount as reflected in current assets.
Bank debt for amounts due on CBIZ's credit facility increased by $38.5 million
to $52.5 million at September 30, 2004 from December 31, 2003, driven primarily
by stock repurchases made during the second and third quarters of 2004. Other
non-current liabilities increased $4.4 million due to the deferred compensation
plan as described above, and capitalized furniture and equipment leases in
connection with consolidation activities in Kansas City.
29
LIQUIDITY AND CAPITAL RESOURCES
CBIZ entered into a modified $100.0 million credit facility effective August 9,
2004. See Note 4 to CBIZ's consolidated financial statements included herewith
for additional information regarding the credit facility. The credit facility
carries an option to increase the total commitment to $125.0 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 the strategic initiatives
noted above. The facility has a five-year term with an expiration date of August
2009. CBIZ is currently in compliance with all covenants under its credit
facility.
At September 30, 2004, CBIZ had $52.5 million outstanding under its credit
facility, leaving approximately $43.6 million of available funds under the
facility based on the terms of the commitment. Management believes that those
available funds, along with cash generated from operations, will be sufficient
to meet its liquidity needs in the foreseeable future.
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 $11.8 million and $30.4 million for the nine months
ended September 30, 2004 and 2003, respectively. In comparison to 2003, the
resulting decrease in cash provided by continuing operating activities during
2004 was primarily a result of a change in net working capital and a change in
income tax refunds and credits realized during 2003. 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,
2004 of $5.8 million primarily consisted of $6.2 million used for capital
expenditures and approximately $4.3 million used toward acquisitions and
contingent consideration earned from previously acquired businesses; see Note 8
to CBIZ's consolidated financial statements included herewith for additional
information regarding acquisitions. Cash provided by investing activities
include $3.0 million of proceeds from divestitures of business units and various
client lists, and $1.7 million from the collections of notes receivables related
primarily to divestitures. Capital expenditures consisted of leasehold
improvements and equipment in connection with the consolidation of certain
offices, IT capital to support growth in the medical practice management unit
and equipment purchases in relation to normal replacement. Net cash used in
investing activities during the nine months ended September 30, 2003 of $4.4
million primarily consisted of $7.6 million used for capital expenditures, and
$3.3 million used toward acquisitions and contingent consideration earned from
previously acquired businesses, and was offset by cash provided through
divestitures of $5.0 million and $1.5 million from the collections of notes
receivables related primarily to divestitures.
Net cash used in financing activities was $5.8 million during the nine months
ended September 30, 2004. During the same period in 2003, net cash used in
investing activities was $27.9 million. Proceeds from bank debt and net cash
provided by operating activities were the primary sources used to fund the
repurchase of $45.3 million of CBIZ capital stock during 2004 and $33.5 million
during 2003.
30
A summary of CBIZ's contractual obligations remaining as of September 30, 2004
is as follows (in thousands):
FISCAL YEAR ENDING
---------------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
ON-BALANCE SHEET
Bank debt (2) ................. $ 52,500 $ -- $ -- $ -- $ -- $ -- $ 52,500
Notes payable and
capitalized leases ......... 4,561 727 2,305 431 402 696 --
Non-cancelable operating
lease obligations .......... 182,429 8,565 28,280 24,240 20,686 18,844 81,814
Restructuring lease
obligations (1) ............ 15,571 1,013 3,127 3,060 3,017 2,377 2,977
OFF-BALANCE SHEET
Letters of credit ............. 2,785 2,091 644 -- -- -- 50
Performance guarantees for
non-consolidated affiliates 1,197 21 1,176 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total ...................... $259,043 $ 12,417 $ 35,532 $ 27,731 $ 24,105 $ 21,917 $137,341
======== ======== ======== ======== ======== ======== ========
(1) Excludes cash payments for subleases.
(2) CBIZ modified its credit facility effective August 9, 2004. The new
facility has a five year term and will expire in August 2009.
OFF-BALANCE SHEET ARRANGEMENTS
CBIZ maintains administrative service agreements with 12 CPA firms, as described
more fully in our Annual Report on Form 10-K for the year ended December 31,
2003, which qualify as variable interest entities under FASB Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities," as amended. The
impact to CBIZ of this accounting pronouncement is not material to the financial
condition, results of operations or cash flows of CBIZ, and is further discussed
in Note 1 of the accompanying consolidated financial statements.
CBIZ provided guarantees of performance obligations for a CPA firm with which
CBIZ maintains an administrative services agreement. Potential obligations under
the guarantees totaled $1.2 million and $0.7 million at September 30, 2004 and
December 31, 2003, respectively. CBIZ expects the guarantees to expire without
the need to advance any cash. In accordance with FASB Interpretation No. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", CBIZ has recognized a
liability for the fair value of the obligation undertaken in issuing these
guarantees. The liability is recorded as other current liabilities in the
accompanying consolidated financial statements.
Letters of credit are issued under our credit facility and are discussed in Note
4 of the accompanying consolidated financial statements.
We have various agreements in which we may be obligated to indemnify the other
party with respect to certain matters. Generally, these indemnification clauses
are included in contracts arising in the normal course of business under which
we customarily agree to hold the other party harmless against losses arising
from a breach of representations, warranties, covenants or agreements, related
to such matters as title to assets sold and certain tax matters. It is not
possible to predict the maximum potential amount of future payments under these
indemnification agreements due to the conditional nature of our obligations and
the unique facts of each particular agreement. Historically, payments made by us
under these agreements have not been material. As of September 30, 2004, we were
not aware of any indemnification agreements that would require material
payments.
31
INTEREST RATE RISK MANAGEMENT
The Company has used interest rate swaps to manage the interest rate mix of its
credit facility and related overall cost of borrowing. Interest rate swaps
involve the exchange of floating for fixed rate interest payments to effectively
convert floating rate debt into fixed rate debt based on a one, three, or
six-month U.S. dollar LIBOR. Interest rate swaps allow the Company to maintain a
target range of fixed to floating rate debt. During the nine months ending
September 30, 2004, management did not utilize interest rate swaps. Management
will continue to evaluate the potential use of interest rate swaps as it deems
appropriate under certain operating and market conditions.
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 forecasted.
REVENUE RECOGNITION AND VALUATION OF UNBILLED REVENUES
Revenue is recognized only when all of the following are present: persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, our fee to the client is fixed or determinable, and collectibility is
reasonably assured, which is in accordance with GAAP and SAB 104. CBIZ offers a
vast array of products and outsourced business services to its clients. Those
services are delivered through three practice groups. A description of revenue
recognition, as it relates to those groups, is provided below:
ACCOUNTING, TAX AND ADVISORY SERVICES -- Revenue consists primarily of
fees for accounting services, preparation of tax returns and consulting services
including Sarbanes-Oxley consulting and compliance projects. Revenues are
recorded in the period in which services are provided and meet revenue
recognition criteria in accordance with SAB 104. 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 the insurance product and
billing arrangement, is described below:
- Commissions relating to brokerage and agency activities whereby CBIZ
has primary responsibility for the collection of premiums from
insured's (agency or indirect billing) are recognized as of the
latter of the effective date of the insurance policy or the date
billed to the customer; commissions to be received directly from
insurance companies (direct billing) are recognized when the policy
becomes effective; and life insurance commissions are recognized
when the policy becomes effective. Commission revenue is reported
net of sub-broker commissions. Commission revenue is reported net of
reserves for estimated policy cancellations and terminations. This
reserve is based upon estimates and assumptions using historical
cancellation and termination experience and other current factors to
project future experience. CBIZ periodically reviews the adequacy of
the reserve and makes adjustments as necessary. The use of different
estimates or assumptions could produce different results.
- Supplemental commissions, which are based upon certain performance
targets, are recognized at the earlier of notification that the
target has been achieved, or cash collection.
- Fee income is recognized in the period in which services are
provided, and may be based on actual hours incurred on an hourly fee
basis, fixed fee arrangements, or asset-based fees.
32
NATIONAL PRACTICES -- The business units that comprise this practice group
offer a variety of services. A description of revenue recognition associated
with the primary services is provided below:
- Mergers & Acquisitions and Capital Advisory -- Revenue associated
with non-refundable retainers is recognized on a pro rata basis over
the life of the engagement. Revenue associated with success fee
transactions is 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
is recognized as services are performed. Consulting revenue is
recognized on an hourly or per diem fee basis as services are
performed.
- Valuation and Property Tax -- Revenue associated with retainer
contracts is recognized on a pro rata basis over the life of the
contract, which is generally twelve months. Revenue associated with
contingency arrangements is recognized once written notification is
received from an outside third party (e.g., assessor in the case of
a property tax engagement) acknowledging that the contingency has
been resolved.
- Medical Management Group -- Fees for services are primarily based on
a percentage of net collections on our clients' patient accounts
receivable. As such, revenue is determinable, earned, and
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 AND OTHER INTANGIBLE ASSETS
CBIZ utilizes the purchase method of accounting for all business combinations in
accordance with Statement of Financial Accounting Standard No., 141, "Business
Combinations" (SFAS 141). Intangible assets, which include client lists and
non-compete agreements, are amortized principally by the straight-line method
over their expected period of benefit, not to exceed ten years.
In accordance with the provisions of SFAS 142, goodwill is not amortized.
Goodwill is tested for impairment annually during the fourth quarter of each
year, 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. There was no goodwill impairment during the three or nine months
ended September 30, 2004 or 2003.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as liabilities
when it is probable that a liability has been incurred and the amount of the
loss is reasonably estimable. Contingent liabilities are often resolved over
long time periods. Estimating probable losses requires analysis that often
depends on judgment about potential actions by third parties.
ESTIMATES OF INCENTIVE COMPENSATION COSTS AND EFFECTIVE INCOME TAX RATES
Incentive compensation costs and income tax expense are two significant expense
categories that are highly dependent upon management estimates and judgments,
particularly at each interim reporting date. In arriving at the amount of
expense to recognize, management believes it makes reasonable estimates and
judgments using all significant information available. Incentive compensation
costs are accrued on a monthly basis, and the ultimate determination is made
after our year-end results are finalized; thus, estimates are subject to change.
Circumstances that could cause our estimates of effective income tax rates to
change include the impact of
33
information that subsequently became available as we prepared our corporate
income tax returns; the level of actual pre-tax income; revisions to tax
positions taken as a result of further analysis and consultation, and changes
mandated as a result of audits by taxing authorities.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above are nevertheless important to
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, 2003.
NEW ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements issued during the three months ended
September 30, 2004 that had or are expected to have a material impact on our
financial position, operating results or disclosures.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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 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 for the year ended December 31, 2003. 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 DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures About Market Risk. CBIZ's floating rate debt under its
credit facility exposes the Company to interest rate risk. A change in the
Federal Funds Rate, or the Reference Rate set by the Bank of America (San
Francisco), would affect the rate at which CBIZ could borrow funds under its
credit facility. If market interest rates were to increase or decrease
immediately and uniformly by 100 basis points from the levels at September 30,
2004, interest expense would increase or decrease by approximately $0.5 million
annually.
CBIZ does not engage in trading market risk sensitive instruments. The Company
has used interest rate swaps to manage the interest rate mix of its credit
facility and related overall cost of borrowing. Interest rate swaps involve the
exchange of floating for fixed rate interest payments to effectively convert
floating rate debt into fixed rate debt based on a one, three, or six-month U.S.
dollar LIBOR. Interest rate swaps allow the Company to maintain a target range
of fixed to floating rate debt. Management will continue to evaluate the
potential use of interest rate swaps as it deems appropriate under certain
operating and market conditions.
Qualitative Disclosures 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
Disclosures about Market Risk" for a further discussion on the potential impact
of a change in interest rates.
34
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We evaluated the effectiveness of our disclosure controls and procedures
("Disclosure Controls") as of the end of the period covered by this report. This
evaluation ("Controls Evaluation") was done with the participation of our
Chairman and Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO").
Disclosure Controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 ("Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure Controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our CEO and CFO, does not expect that our Disclosure
Controls or our internal controls over financial reporting ("Internal Controls")
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, but not absolute, assurance
that the objectives of a control system are met. Further, any control system
reflects limitations on resources, and the benefits of a control system must be
considered relative to its costs. 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 CBIZ have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of a control. A design of a control system is also based upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
We are currently expending extensive internal and external resources to document
and test our internal controls in preparation for issuing our annual assessment
of our internal controls as required by Section 404 of the Sarbanes-Oxley Act of
2002 and the associated audit of those controls by our external auditors at the
end of fiscal year 2004. The Company believes that we will be able to issue a
positive assessment of our internal controls as part of our fiscal 2004 Annual
Report on Form 10-K. However, until our assessment is complete, there can be no
guarantee that management's report will conclude that our controls are
effective.
In the course of its on-going evaluation, the Company has identified certain
deficiencies at one of its national insurance units. In response, the Company
has allocated additional resources to support the operations of this unit, and
is in the process of implementing a new system and additional controls. The
Company believes that sufficient resources have been deployed at this unit to
ensure that disclosure controls and procedures are effective.
CONCLUSIONS
Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, the Disclosure Controls are effective in
providing reasonable assurance that material information required to be
disclosed by us in the reports that we file or submit under the Exchange act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
Other than disclosed above, there were no changes in our Internal Controls that
occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, our Internal Controls.
35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since September 1999, seven purported stockholder class-action lawsuits filed
against CBIZ and certain of our current and former directors and officers were
consolidated as In Re Century Business Services Securities Litigation, Case
No.1:99CV2200, in the United States District Court for the Northern District of
Ohio. The plaintiffs alleged that the named defendants violated certain
provisions of the Securities Exchange Act of 1934 and certain rules promulgated
thereunder in connection with certain statements made during various periods
from February, 1998, through January, 2000, by, among other things, improperly
amortizing goodwill and failing to adequately monitor changes in operating
results. The United States District Court dismissed the matter with prejudice on
June 27, 2002. The matter was appealed by the plaintiffs to the Sixth Circuit
Court of Appeals. On March 30, 2004, the Court of Appeals affirmed the dismissal
of the plaintiffs' complaint in its entirety. The Court also upheld the lower
court's denial of the plaintiffs' request for leave to amend their complaint.
CBIZ believes that further appeal is now time-barred and that this matter is
concluded.
The Company is a defendant in the case In Re Heritage Bond Litigation, Case No.
02-ML-1475 DT (RCx), pending in the Central District of California, as well as a
related unconsolidated matter in which plaintiffs allege numerous claims,
including mismanagement and misappropriation of funds from a bond financing,
against unrelated parties, The Heritage Group and its trustee, U.S. Trust. As
part of these cases, the plaintiffs brought an action against two CBIZ
subsidiaries (CBIZ Valuation Group, Inc. and CBIZ Accounting, Tax & Advisory,
Inc.) alleging negligence and negligent misrepresentation in connection with the
provision of valuation and feasibility study services to The Heritage Group.
These claims have been pending since 2001 and relate to services performed from
1996 through 2000. Plaintiffs in the class litigation have now attempted to join
Century Business Services, Inc. as a party defendant as well.
The Company has received from the plaintiffs reduced offers and demands to
settle these suits for approximately $7.0 million, an amount well in excess of
the net revenue of the subsidiaries. As a result of the failure of the insurers
of Century and its subsidiaries to completely cover the cost of settlement and
defense, Century has filed suit against its carriers to determine its coverage
rights. Although the ultimate disposition of these proceedings are not presently
determinable, management continues to believe that the ultimate resolutions of
these matters will not have a material adverse effect on the financial
condition, results of operations or cash flows of CBIZ.
In addition to those items disclosed above, CBIZ is from time to time subject to
claims and suits arising in the ordinary course of business. 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.
36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 3, 2004, the Board of Directors authorized a share repurchase of up to
8.5 million shares of CBIZ common stock. A supplement to the plan was approved
by the Board of Directors on May 27, 2004, authorizing CBIZ to purchase an
additional 2.0 million shares of CBIZ common stock, for a total of 10.5 million
shares. These plans expire December 31, 2004, and CBIZ does not intend to
terminate any plan prior to its expiration.
ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------------------------------------------
TOTAL TOTAL NUMBER OF MAXIMUM NUMBER OF
NUMBER OF AVERAGE SHARES PURCHASED SHARES THAT MAY YET
SHARES PRICE PAID AS PART OF PUBLICLY BE PURCHASED UNDER
PERIOD PURCHASED PER SHARE (1) ANNOUNCED PLAN THE PLAN
- ----------------------------- --------- ------------- ------------------- -------------------
July 1 - July 31, 2004 (2) 26,800 $ 4.17 26,800 2,509,434
August 1 - August 31, 2004 (2) 881,300 $ 4.13 881,300 1,628,134
September 1 - September 30, 385,400 $ 4.37 385,400 1,242,734
2004 (2) (3)
--------- -------- ---------
Total 1,293,500 $ 4.20 1,293,500
========= ======== =========
(1) Average price paid per share includes fees and commissions.
(2) Open market repurchases.
(3) The Company utilized, and may utilize in the future, a Rule 10b5-1 trading
plan to allow for repurchases by the Company during periods when it would not
normally be active in the trading market due to regulatory restrictions. Under
the Rule 10b5-1 trading plan, the Company is unable to repurchase shares above a
pre-determined price per share. Additionally, the maximum number of shares that
may be purchased by the Company each day is governed by Rule 10b-18.
See Note 4 to the accompanying consolidated financial statements for a
description of working capital restrictions and limitations upon the payment of
dividends.
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.
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.
37
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the
three months ended September 30, 2004:
On August 2, 2004, CBIZ furnished a current report on Form 8-K to
provide investors with its financial results for the three and six
months ended June 30, 2004, as released to the public and discussed
on a conference call on July 27, 2004.
On August 11, 2004, CBIZ filed a current report on Form 8-K to
announce that the Company entered into a new credit facility
effective August 9, 2004.
38
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 9, 2004 By: /s/ Ware H. Grove
--------------------------
Ware H. Grove
Chief Financial Officer
39