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 JUNE 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 July 31, 2004
--------------------- -------------------
Par value $.01 per share 77,807,929
1
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2004 and 2003 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2004 and 2003 5
Notes to the Consolidated Financial Statements 6-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION :
Item 1. Legal Proceedings 31
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 33
Signature 34
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 4,262 $ 3,791
Restricted cash ....................................... 12,540 10,880
Accounts receivable, net .............................. 118,482 111,222
Notes receivable - current ............................ 660 1,315
Income taxes recoverable .............................. - 438
Deferred income taxes - current ....................... 3,419 3,667
Other current assets .................................. 9,864 7,741
Assets of businesses held for sale .................... 770 821
--------- ---------
Current assets before funds held for clients ...... 149,997 139,875
Funds held for clients ................................ 36,203 44,917
--------- ---------
Total current assets .............................. 186,200 184,792
Property and equipment, net ............................. 39,866 40,253
Notes receivable - non-current .......................... 3,578 2,433
Deferred income taxes - non-current ..................... 4,404 4,197
Goodwill and other intangible assets, net ............... 171,382 167,280
Other assets ............................................ 5,792 3,190
--------- ---------
Total assets ...................................... $ 411,222 $ 402,145
========= =========
LIABILITIES
Current liabilities:
Accounts payable ..................................... $ 28,625 $ 28,641
Income taxes payable ................................. 4,115 -
Other current liabilities ............................ 35,590 34,331
Liabilities of businesses held for sale .............. 396 515
--------- ---------
Current liabilities before client fund obligations 68,726 63,487
Client fund obligations .............................. 36,203 44,917
--------- ---------
Total current liabilities ........................ 104,929 108,404
Bank debt ............................................... 46,825 14,000
Other non-current liabilities ........................... 6,186 1,903
--------- ---------
Total liabilities ................................ 157,940 124,307
--------- ---------
STOCKHOLDERS' EQUITY
Common stock ............................................ 961 957
Additional paid-in capital .............................. 442,810 441,407
Accumulated deficit ..................................... (115,475) (129,438)
Treasury stock .......................................... (75,004) (35,087)
Accumulated other comprehensive loss .................... (10) (1)
--------- ---------
Total stockholders' equity ....................... 253,282 277,838
--------- ---------
Total liabilities and stockholders' equity ....... $ 411,222 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenue ............................................... $ 127,151 $ 124,416 $ 274,757 $ 268,570
Operating expenses..................................... 113,451 110,408 232,326 226,296
--------- --------- --------- ---------
Gross margin .......................................... 13,700 14,008 42,431 42,274
Corporate general and administrative expense .......... 6,055 4,912 11,434 9,693
Depreciation and amortization expense ................. 4,148 4,318 8,129 8,581
--------- --------- --------- ---------
Operating income ...................................... 3,497 4,778 22,868 24,000
Other income (expense):
Interest expense .................................... (429) (297) (669) (620)
Gain on sale of operations, net ..................... 534 1,784 917 1,784
Other income (expense), net ......................... 295 (17) 831 (1,023)
--------- --------- --------- ---------
Total other income, net ........................ 400 1,470 1,079 141
Income from continuing operations before
income tax expense ................................. 3,897 6,248 23,947 24,141
Income tax expense .................................... 1,319 2,624 9,660 10,221
--------- --------- --------- ---------
Income from continuing operations ..................... 2,578 3,624 14,287 13,920
Loss from operations of discontinued businesses, net of
tax ............................................... (196) (194) (324) (489)
Loss on disposal of discontinued businesses, net of
tax ............................................... - (183) - (183)
--------- --------- --------- ---------
Net income ............................................ $ 2,382 $ 3,247 $ 13,963 $ 13,248
========= ========= ========= =========
Earnings per share:
Basic:
Continuing operations ............................ $ 0.03 $ 0.04 $ 0.17 $ 0.14
Discontinued operations .......................... - (0.01) - -
--------- --------- --------- ---------
Net income ....................................... $ 0.03 $ 0.03 $ 0.17 $ 0.14
========= ========= ========= =========
Diluted:
Continuing operations ............................ $ 0.03 $ 0.04 $ 0.17 $ 0.14
Discontinued operations .......................... - (0.01) - -
--------- --------- --------- ---------
Net income ....................................... $ 0.03 $ 0.03 $ 0.17 $ 0.14
========= ========= ========= =========
Basic weighted average shares outstanding ............. 77,885 95,138 81,661 95,112
========= ========= ========= =========
Diluted weighted average shares outstanding ........... 80,150 97,178 84,038 97,073
========= ========= ========= =========
See the accompanying notes to the consolidated financial statements.
4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 13,963 $ 13,248
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from operations of discontinued businesses ...................... 324 489
Loss on disposal of discontinued businesses .......................... --- 183
Gain on sale of operations ........................................... (917) (1,784)
Bad debt expense, net of recoveries .................................. 2,573 2,340
Impairment of notes receivable ....................................... --- 2,014
Depreciation and amortization ........................................ 8,129 8,581
Deferred income taxes ................................................ 41 (4,559)
Changes in assets and liabilities, net of acquisitions and dispositions:
Restricted cash ...................................................... (1,660) 4,339
Accounts receivable, net ............................................. (12,176) (19,202)
Other assets ......................................................... (5,811) (1,641)
Accounts payable ..................................................... (106) 5,544
Income taxes ......................................................... 4,553 12,424
Accrued expenses and other liabilities ............................... 1,809 (3,431)
--------- ---------
Net cash provided by continuing operations ................................ 10,722 18,545
Net cash (used in) provided by discontinued operations .................... (393) 2,840
--------- ---------
Net cash provided by operating activities ................................. 10,329 21,385
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired and contingent
consideration earned .................................................. (3,300) (1,880)
Cash proceeds from divested operations and client list ................. 3,029 3,843
Additions to property and equipment, net ............................... (4,129) (5,098)
Net decrease in notes receivable ....................................... 1,111 272
--------- ---------
Net cash used in investing activities ..................................... (3,289) (2,863)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt ................................................ 152,575 76,250
Proceeds from notes payable ............................................ 364 58
Payment of bank debt ................................................... (119,750) (93,750)
Payment of notes payable and capitalized leases ........................ (795) (1,128)
Payment for acquisition of treasury stock .............................. (39,773) ---
Proceeds from exercise of stock options and warrants ................... 810 141
--------- ---------
Net cash used in financing activities ..................................... (6,569) (18,429)
--------- ---------
Net increase in cash and cash equivalents ................................. 471 93
Cash and cash equivalents at beginning of year ............................ 3,791 6,351
--------- ---------
Cash and cash equivalents at end of period ................................ $ 4,262 $ 6,444
========= =========
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 June 30, 2004, and December 31,
2003, and the results of their operations for the three and six months
ended June 30, 2004, and 2003 and cash flows for the six months ended
June 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 relate to costs incurred directly at the 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 $82.7 million and $81.3
million for the three months ended June 30, 2004 and 2003, and $170.6
million and $168.1 million for the six months ended June 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 $8.8
million and $8.6 million for the three months ended June 30, 2004 and
2003, and $17.8 million and $17.2 million for the six months ended June
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, and property tax payments. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
2004 2003 2004 2003
--------- --------- ---------- ----------
Net income as reported ....... $ 2,382 $ 3,247 $ 13,963 $ 13,248
Fair value of stock-based
compensation, net of tax ... (358) (816) (707) (1,618)
--------- --------- ---------- ----------
Pro forma net income ......... $ 2,024 $ 2,431 $ 13,256 $ 11,630
========= ========= ========== ==========
Earnings per share:
Basic - as reported ...... $ 0.03 $ 0.03 $ 0.17 $ 0.14
Basic - pro forma ........ $ 0.03 $ 0.02 $ 0.16 $ 0.12
Diluted - as reported .... $ 0.03 $ 0.03 $ 0.17 $ 0.14
Diluted - pro forma ...... $ 0.03 $ 0.02 $ 0.16 $ 0.12
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):
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
Trade accounts receivable .............. $85,406 $82,478
Unbilled revenue ....................... 43,977 37,360
--------- ---------
Total accounts receivable .............. 129,383 119,838
Less allowance for doubtful accounts ... (10,901) (8,616)
--------- ---------
Accounts receivable, net ............... $118,482 $111,222
========= =========
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of goodwill and other intangible assets, net were as
follows (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
Goodwill ...................................... $159,851 $157,815
Intangibles:
Client lists ................................ 15,798 13,493
Other intangibles ........................... 897 682
--------- ---------
Total intangibles ...................... 16,695 14,175
Total goodwill and other intangible assets .... 176,546 171,990
Less accumulated amortization ................. (5,164) (4,710)
--------- ---------
Total goodwill and other intangible assets, net $171,382 $167,280
========= =========
Client lists are amortized over periods not exceeding ten years. Other
intangibles, which consist primarily of non-compete agreements and
website development costs, are amortized over periods ranging from two
to ten years. Amortization expense of client lists and other intangible
assets was approximately $0.4 million and $0.3 million for the three
months ended June 30, 2004 and 2003 and $0.8 million and $0.7 million
for the six months ended June 30, 2004 and 2003, respectively.
8
4. BANK DEBT
Bank debt balances were as follows (in thousands, except percentages):
JUNE 30, DECEMBER 31,
2004 2003
------------- -------------
Bank debt:
Revolving credit facility ... $ 46,825 $ 14,000
============= =============
Weighted average rates(1) ... 3.31% 4.39%
============= =============
Range of effective rates(1) . 3.06% - 4.75% 3.08% - 5.58%
============= =============
(1) Rates are provided for the six months ended June 30, 2004, and
the twelve months ended December 31, 2003, respectively.
CBIZ maintains a $73.0 million revolving credit facility with a group
of four banks. The facility was amended during the first quarter 2004
to allow the repurchase of up to $50.0 million of CBIZ common stock on
or before December 31, 2004, and to permit, under limited
circumstances, an over-advance of $5.0 million to $10.0 million toward
the borrowing base through September 30, 2004. At June 30, 2004, based
on the borrowing base calculation, CBIZ had approximately $11.9 million
of available funds under its credit facility. Management believes that
the carrying amount of bank debt recorded at June 30, 2004,
approximates its fair value.
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 40 to 50 basis points is charged on the unused
portion of the facility. Borrowings and commitments by the banks under
the credit facility mature in September 2005. The credit facility is
secured by substantially all assets and capital stock of CBIZ and its
subsidiaries.
The bank agreement contains financial covenants that require CBIZ to
meet certain requirements with respect to (i) minimum net worth; (ii)
maximum leverage ratio; and (iii) a minimum fixed charge coverage
ratio. Limitations are also placed on CBIZ's ability to acquire
businesses, repurchase CBIZ common stock and to divest operations. As
of June 30, 2004, CBIZ is in compliance with its covenants.
The bank credit 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 June 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 $1.1 million and $0.7 million
as of June 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 expects that this opinion and order will end
proceedings in this case, although further appeal technically is
permissible.
The Company is a defendant in the case In Re Heritage Bond Litigation,
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 this case, 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.
On April 22, 2004, the Magistrate Judge handling discovery issues in
the case entered an order treating CBIZ Valuation as if it had admitted
certain facts as a result of the failure by the Company's former
outside counsel handling the case to timely file a discovery response.
This law firm did not inform the Company or its subsidiary that it had
missed the discovery response filing deadline or that the April 22nd
order had been entered against the Company's subsidiary.
The Company retained Irell & Manella LLP to represent its subsidiaries
in connection with this case going forward. On June 28, 2004, following
a hearing before U.S. District Court Judge Dickran Tevrizian, the Court
granted the motion of CBIZ Valuation to reconsider and set aside the
Magistrate Judge's earlier order. The admissions have been withdrawn
and CBIZ Valuation has filed a proper response to the requests for
admissions. Although the Company cannot predict the outcome of this
case, the Company continues to believe that it has a strong defense to
the claims against its subsidiaries.
The Company has received from the plaintiffs offers and demands to
settle these suits for approximately $13.0 million. Discovery in these
matters currently is set to continue through August 2004. Although the
ultimate disposition of this proceeding is not presently determinable,
management continues to believe that the ultimate resolution of this
matter 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.
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 first six months of 2004 and 2003 there were no
significant charges related to consolidation and integration activity.
10
Consolidation and integration reserve balances for leases as of
December 31, 2003, and activity during the six-month period ended June
30, 2004, was as follows (in thousands):
LEASE
CONSOLIDATION
-------------
Reserve balance at December 31, 2003 $ 2,804
Amounts adjusted against income (1) 306
Payments ........................... (1,218)
-------
Reserve balance at June 30, 2004 ... $ 1,892
=======
(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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
NUMERATOR:
----------
Net income ..................... $ 2,382 $ 3,247 $13,963 $13,248
DENOMINATOR:
------------
BASIC
Weighted average common
shares ....................... 77,885 95,138 81,661 95,112
------- ------- ------- -------
DILUTED
Options, restricted stock
awards and contingent
shares(1) ................. 2,265 2,040 2,377 1,961
------- ------- ------- -------
Total 80,150 97,178 84,038 97,073
------- ------- ------- -------
Basic net income per share ..... $ 0.03 $ 0.03 $ 0.17 $ 0.14
======= ======= ======= =======
Diluted net income per share ... $ 0.03 $ 0.03 $ 0.17 $ 0.14
======= ======= ======= =======
(1) Contingent shares represent shares that will not be issued
until future conditions have been met.
8. ACQUISITIONS
During the six months ended June 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. Consideration 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.
11
During the six months ended June 30, 2003, CBIZ completed the
acquisition of a benefits and insurance firm in Boca Raton, Florida,
and the client lists of two benefits agencies. CBIZ also completed the
acquisition of an accounting, tax and advisory firm in Orange County,
California. The aggregate purchase price of the acquisitions was
approximately $6.6 million, comprised of $1.8 million in cash and
177,000 shares of restricted common stock (estimated stock value of
$0.3 million at acquisition) paid at closing, and up to an additional
$4.5 million 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. The excess of purchase price over fair value
of net assets acquired was allocated to goodwill, client lists, and
non-compete agreements. Acquisitions, including contingent
consideration earned, resulted in increases to goodwill, client lists
and other intangible assets during the six months ended June 30, 2004,
of $2.3 million, $2.8 million, and $0.2 million, respectively.
Acquisitions completed during the six months ended June 30, 2003
resulted in increases to goodwill, client lists and other intangible
assets of $0.1 million, $2.6 million, and $0.1 million, respectively.
9. DIVESTITURES
During the first quarter of 2004, CBIZ sold an Accounting, Tax, and
Advisory (ATA) business operation and a client list within the 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
operations.
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
operation, and is classified as such in the accompanying consolidated
financial statements.
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 operation. During the
second quarter of 2003, CBIZ sold two businesses within the B&I
practice group for aggregate proceeds of $4.2 million cash. These sales
resulted in a $1.8 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 operations.
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
12
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 six-month periods ended June 30, 2004 and
2003 were as follows (in thousands):
THREE MONTHS ENDED JUNE 30, 2004
------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
---------- ---------- -------- -------- --------- ---------
Revenue ..................................... $ 49,679 $ 38,892 $ 21,519 $ 17,061 $ -- $ 127,151
Operating expenses .......................... 45,978 32,041 17,814 15,425 2,193 113,451
--------- --------- --------- --------- --------- ---------
Gross margin ....................... 3,701 6,851 3,705 1,636 (2,193) 13,700
Corporate general & administrative .......... - - - - 6,055 6,055
Depreciation and amortization ............... 960 795 675 202 1,516 4,148
--------- --------- --------- --------- --------- ---------
Operating income (loss) ............ 2,741 6,056 3,030 1,434 (9,764) 3,497
Other income (expense):
Interest expense ................... (13) (7) - - (409) (429)
Gain on sale of operations, net .... - - - - 534 534
Other income (expense), net ........ 44 105 (8) 119 35 295
--------- --------- --------- --------- --------- ---------
Total other income (expense), net .. 31 98 (8) 119 160 400
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes ........... $ 2,772 $ 6,154 $ 3,022 $ 1,553 $ (9,604) $ 3,897
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
---------- ---------- -------- -------- --------- ---------
Revenue ..................................... $ 50,058 $ 38,490 $ 18,670 $ 17,198 $ -- $ 124,416
Operating expenses .......................... 45,347 30,722 15,229 17,573 1,537 110,408
--------- --------- --------- --------- --------- ---------
Gross margin .................. 4,711 7,768 3,441 (375) (1,537) 14,008
Corporate general & administrative .......... - - - - 4,912 4,912
Depreciation and amortization ............... 1,237 730 646 273 1,432 4,318
--------- --------- --------- --------- --------- ---------
Operating income (loss) ........ 3,474 7,038 2,795 (648) (7,881) 4,778
Other income (expense):
Interest expense ....................... (14) (21) - - (262) (297)
Gain on sale of operations, net ........ - - - - 1,784 1,784
Other income (expense), net ............ 42 33 (90) (71) 69 (17)
--------- --------- --------- --------- --------- ---------
Total other income (expense), net .... 28 12 (90) (71) 1,591 1,470
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes ............ $ 3,502 $ 7,050 $ 2,705 $ (719) $ (6,290) $ 6,248
========= ========= ========= ========= ========= =========
14
SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
---------- ---------- --------- --------- --------- ---------
Revenue ................................. $ 120,408 $ 76,932 $ 42,059 $ 35,358 $ -- $ 274,757
Operating expenses ...................... 95,315 64,166 35,211 31,471 6,163 232,326
--------- --------- --------- --------- --------- ---------
Gross margin .................... 25,093 12,766 6,848 3,887 (6,163) 42,431
Corporate general & administrative ...... - - - - 11,434 11,434
Depreciation and amortization ........... 1,870 1,532 1,337 416 2,974 8,129
--------- --------- --------- --------- --------- ---------
Operating income (loss) ......... 23,223 11,234 5,511 3,471 (20,571) 22,868
Other income (expense):
Interest expense ................ (18) (15) - - (636) (669)
Gain on sale of operations, net . - - - - 917 917
Other income (expense), net ..... 259 83 (8) 284 213 831
--------- --------- --------- --------- --------- ---------
Total other income (expense), net 241 68 (8) 284 494 1,079
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes ....... $ 23,464 $ 11,302 $ 5,503 $ 3,755 $ (20,077) $ 23,947
========= ========= ========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------------
NATIONAL
PRACTICE GROUP
-----------------------
ACCOUNTING MEDICAL NATIONAL
TAX & BENEFITS & PRACTICE PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL
----------- ---------- --------- --------- --------- ---------
Revenue ................................. $ 119,032 $ 78,371 $ 36,248 $ 34,919 $ -- $ 268,570
Operating expenses ...................... 93,253 62,805 30,384 35,836 4,018 226,296
--------- --------- --------- --------- --------- ---------
Gross margin ............. 25,779 15,566 5,864 (917) (4,018) 42,274
Corporate general & administrative ...... - - - - 9,693 9,693
Depreciation and amortization ........... 2,477 1,484 1,247 578 2,795 8,581
--------- --------- --------- --------- --------- ---------
Operating income (loss) .... 23,302 14,082 4,617 (1,495) (16,506) 24,000
Other income (expense):
Interest expense ................... (27) (44) (1) (1) (547) (620)
Gain on sale of operations, net .... - - - - 1,784 1,784
Other income (expense), net ........ 120 85 (91) 151 (1,288) (1,023)
--------- --------- --------- --------- --------- ---------
Total other income (expense), net 93 41 (92) 150 (51) 141
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes ........ $ 23,395 $ 14,123 $ 4,525 $ (1,345) $ (16,557) $ 24,141
========= ========= ========= ========= ========= =========
15
11. DISCONTINUED OPERATIONS
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 June 30, 2004. These business operations
are reported as discontinued operations 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 six months ended June 30, 2004 and 2003 were as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenue ............................ $ 260 $ 2,251 $ 632 $ 4,826
======= ======= ======= =======
Loss from operations of discontinued
businesses before income taxes (347) (278) (503) (715)
Income tax benefit ................ (151) (84) (179) (226)
------- ------- ------- -------
Loss from operations of discontinued
businesses, net of tax ........ $ (196) $ (194) $ (324) $ (489)
======= ======= ======= =======
The assets and liabilities of the business units classified as
discontinued operations consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------- --------
Accounts receivable, net ................. $ 467 $ 479
Property and equipment, net .............. 273 286
Deferred tax asset, net .................. 23 23
Other assets ............................. 7 33
-------- --------
Assets of businesses held for sale .... $ 770 $ 821
======== ========
Accounts payable ......................... $ 215 $ 110
Other current liabilities ................ 181 405
-------- --------
Liabilities of businesses held for sale $ 396 $ 515
======== ========
Loss on disposal of discontinued businesses for the three and six
months ended June 30, 2003 was $0.3 million before tax and $0.2 million
net of tax. There were no gains or losses recorded for the disposal of
a discontinued business during the three or six months ended June 30,
2004.
12. SUBSEQUENT EVENTS
Effective August 9, 2004, CBIZ modified its credit facility increasing
the total commitment to $100.0 million. In addition to lowering the
Company's cost of borrowing, the facility provides CBIZ additional
flexibility and funding to support operations and other strategic
initiatives, including acquisitions and share repurchases. The
covenants and restrictions on dividend payments are similar to those
under the previous facility. The new facility will expire in August
2009.
CBIZ repurchased 130,300 shares of its common stock in the open market
subsequent to June 30, 2004. The shares were repurchased for an average
price of $4.21 per share, or $0.5 million, under a plan approved by the
Board of Directors on March 3, 2004 and supplemented on May 27, 2004.
16
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 June 30, 2004 and December 31, 2003, and results of
operations for the three and six months ended June 30, 2004 and 2003 and cash
flows for the six months ended June 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 six months ended June 30, 2004, CBIZ has acquired three businesses,
two of which were acquired during the second quarter. Businesses acquired
include a benefits and insurance firm in Chicago, Illinois, an accounting tax
and advisory firm in Denver, Colorado, and a technology firm in Cleveland, Ohio.
CBIZ expects the acquisition rate to increase in the second half of 2004 and
into next year, and has recently 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 first quarter of 2004, CBIZ
sold a business operation and a client list within the accounting, tax and
advisory practice group. During the second quarter of 2004, CBIZ sold two client
lists and related assets within the ATA practice group, and a client list and
related assets within the B&I practice group. In addition, CBIZ has committed to
the disposal of a business unit within the National Practices practice group,
which remains available for sale at June 30, 2004.
A disproportionately large amount of CBIZ's revenue occurs in the first half of
the year, primarily in the first quarter. This is due to the Company's
accounting and tax practice, which is subject to seasonality related to heavy
volume in the first four months of the year. These higher revenue levels are
supported by operating costs that are primarily fixed in nature, and thus result
in higher operating margins in the first half of the year. For the year ended
December 31, 2003, total ATA revenue of $203.4 million was earned in the
following proportions: 33.9%, 24.6%, 20.9% and 20.6% in each of the quarters
ended March 31, June 30, September 30, and December 31, 2003, respectively.
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 464,000
17
shares at a cost of approximately $2.0 million through June 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 million, and expires
August 2009. The modified credit facility is discussed in further detail in note
12 to the accompanying consolidated financial statements.
OUTSOURCED BUSINESS SERVICES
A comprehensive description of the outsourced business services currently
offered by CBIZ through its three practice groups is included in the 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 $15.0 million
and $46.7 million for the three and six months ended June 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 revenue.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 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. The ATA group contributed approximately
$49.7 million and $50.1 million of revenue, or approximately 39.1% and 40.2% of
CBIZ's total revenue for the three months ended June 30, 2004 and 2003,
respectively. The increase in revenue attributable to acquisitions was $1.6
million, most of which was derived from Sarbanes-Oxley consulting services from
CBIZ Harborview, which was acquired in September 2003. Revenue declined by $0.5
million due to divestitures. For ATA businesses with a full period of operations
for the three months ended June 30, 2004 and 2003, same-unit revenue decreased
approximately $1.5 million, or 3.0%. While hourly rates charged to clients have
not changed significantly from the prior year, the aggregate number of hours
charged to clients has declined slightly due to a reduction in headcount from a
year ago. Therefore, the decrease is same-unit revenue is primarily attributable
to fewer hours charged to clients, resulting from reduced capacity, specifically
in four of our larger units. Gross margins decreased from 9.4% in 2003 to 7.4%
in 2004 primarily due to the decrease in same unit revenues combined with
increases in facility costs associated with consolidations completed in 2003.
18
BENEFITS AND INSURANCE SERVICES. The Benefits and Insurance group contributed
approximately $38.9 million and $38.5 million of revenue, or approximately 30.6%
and 31.0% of CBIZ's total revenue for the three months ended June 30, 2004 and
2003, respectively. Acquisitions accounted for an increase in revenue of $0.7
million compared to the second quarter of 2003, offset by a decrease in revenue
of $2.3 million compared to the second quarter of 2003, related to the
divestiture of the Health Administration Services unit in May, 2003. For
Benefits and Insurance businesses with a full period of operations for the three
months ended June 30, 2004 and 2003, same-unit revenue increased $2.0 million,
or 5.6%, primarily attributable to an increase in specialty life insurance
sales.
Gross margin for the Benefits and Insurance group for the three months ended
June 30, 2004 was 17.6% as compared to 20.2% for the three months ended June 30,
2003. The decline in margin is a result of additional investment in sales
personnel during 2004. CBIZ expects the investments in sales personnel to result
in margin improvement in future periods, once they have had time to establish
their productions levels. In addition, a significant decline in gross margin is
attributable to one of the national businesses within the benefits and insurance
group. This unit has experienced significant growth over the last several years,
which has resulted in system, client service, and other operational challenges
as a result of the rapid growth. 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. Revenue
adjustments resulting from higher policy terminations than originally estimated,
combined with higher expenses to support growth by this unit resulted in a
decrease in the gross margin of approximately $0.7 million.
NATIONAL PRACTICES SERVICES. The National Practices group contributed
approximately $38.6 million and $35.8 million of revenue, or approximately 30.3%
and 28.8% of CBIZ's total revenue for the quarters ended June 30, 2004 and 2003,
respectively.
CBIZ Medical Management Professionals (CBIZ MMP). CBIZ's medical practice
management unit, which is included in the results of the National Practices
group, contributed approximately $21.5 million and $18.6 million, or 16.9% and
15.0%, of CBIZ's total revenue for the three months ended June 30, 2004 and
2003, respectively. CBIZ MMP's revenue growth of 15.3% compared to second
quarter a year ago is primarily attributable to the addition of new clients
obtained since the second quarter of 2003. Gross margin for CBIZ MMP for the
three months ended June 30, 2004 was 17.2% as compared to 18.4% for the three
months ended June 30, 2003. The decline in gross margin is primarily
attributable to investments made in human capital to support and facilitate its
growth.
National Practice Services - Other. The other units within the National
Practices group, excluding CBIZ MMP, contributed approximately $17.1 million and
$17.2 million of revenue, or approximately 13.4% and 13.8% of CBIZ's total
revenue for the three months ended June 30, 2004 and 2003, respectively.
Same-unit revenue increased $0.5 million and the acquisition of a technology
business accounted for $0.3 million of the increase. These increases were offset
by a decline in revenue of $0.9 million related to the closure of unprofitable
locations in the property tax and technology businesses during 2003.
Approximately $0.8 million increase in same-unit revenue was a result of two
transactions closed during the second quarter of 2004 in CBIZ's mergers and
acquisition business offset by weaker revenue in CBIZ's healthcare consulting
and valuation businesses. Gross margin for National Practices - Other for the
three months ended June 30, 2004 was 9.6% as compared to a loss of 2.2% for the
three months ended June 30, 2003. The improvement in gross margin is
attributable to revenue associated with the mergers and acquisitions business,
combined with improvements and operational efficiencies in the payroll,
technology and valuation businesses.
Revenue
Total revenue for the three months ended June 30, 2004 was $127.2 million as
compared to $124.4 million for the three months ended June 30, 2003,
representing an increase of $2.8 million, or 2.2%. The increase in revenue
attributable to acquisitions completed subsequent to June 30, 2003 was $2.6
million, and was offset by a decrease in revenue of $3.7 million due to
divestitures completed subsequent to June 30, 2003. For business units with a
full period of operations for the three months ended June 30, 2004 and 2003,
revenue increased $3.9 million or 3.2%. A more comprehensive analysis of revenue
by each operating practice group is discussed above.
19
Expenses
Operating expenses increased to $113.5 million for the three-month period ended
June 30, 2004, from $110.4 million for the comparable period in 2003, an
increase of $3.1 million or 2.8%. The primary components of operating expenses
are personnel costs and occupancy expense, representing 80.6% and 81.5% of total
operating expenses for the three months ended June 30, 2004 and 2003,
respectively.
The increase in operating expenses supported growth in revenue, remaining
relatively consistent as a percent of revenue at 88.7% and 88.5% (excluding
consolidation and integration charges) for the three months ended June 30, 2004
and 2003, respectively. The slight increase as a percent of revenue was driven
by increases in direct costs, professional fees and equipment costs, offset by
efficiencies gained in personnel costs. Direct costs increased as a percent of
revenue to 4.6% for the three months ended June 30, 2004 from 4.4% for the
comparable period in 2003, primarily due to a higher portion of revenue in the
B&I practice group being generated with third party brokers. Professional fees
increased as a percent of revenue to 1.7% from 1.2% for the three months ended
June 30, 2004 and 2003, respectively, driven by the acquisition of two
Accounting, Tax and Advisory firms in the second and third quarters of 2003,
that utilize external consultants to deliver services to clients. Personnel
costs were $82.7 million or 65.0% of total revenue for the three months ended
June 30, 2004 and $81.3 million or 65.4% of total revenue for the three months
ended June 30, 2003. Personnel costs decreased as a percent of revenue due to
efficiencies gained through staff reductions in the ATA practice group. Staff
reductions were somewhat offset by the addition of personnel in wealth
management, benefits services and medical management to support revenue growth,
and by annual merit increases in compensation that occurred in April, 2004.
Consolidation and integration charges are reported as operating expenses in the
accompanying consolidated financial statements, and increased as a percent of
revenue to 0.5% from 0.3% for the three months ended June 30, 2004 and 2003,
respectively. The increase in restructuring expenses occurred as the result of
an adjustment to our estimated noncancellable lease obligations in the second
quarter of 2004.
Corporate general and administrative expenses increased to $6.1 million for the
three-month period ended June 30, 2004, from $4.9 million for the comparable
period in 2003. Corporate general and administrative expenses represented 4.8%,
and 4.0% of total revenues for the three-month periods ended June 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. Annual merit increases in compensation
that occurred in April, 2004 also contributed to this increase.
Depreciation and amortization expense decreased to $4.1 million for the
three-month period ended June 30, 2004, from $4.3 million for the comparable
period in 2003, a decrease of $0.2 million, or 3.9%. 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 $0.6
million for the quarter ended June 30, 2004 and $0.3 million for the quarter
ended June 30, 2003. As a percentage of total revenue, depreciation and
amortization expense was 3.3% for the three-month period ended June 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 June
30, 2004, from $0.3 million for the comparable period in 2003, an increase of
$0.1 million, or 44.4%. The increase is the result of higher average debt during
the second quarter of 2004, of $48.1 million, compared to $10.7 million during
the second quarter of 2003. Higher debt in the second quarter of 2004 is due
primarily to share repurchase activity, and is further described under
"Liquidity and Capital Resources". The increase in interest expense due to the
higher debt balance was offset by a decrease in average interest rates to 3.29%
for the three months ended June 30, 2004 from 4.57% for the three months ended
June 30, 2003. Additionally, interest expense for the second quarter of 2003
included fees related to an interest rate swap that was terminated during the
third quarter of 2003.
Gain on sale of operations, net was $0.5 million for the three months ended June
30, 2004, and was related to the sale of two client lists and related assets in
the ATA practice group, and a client list and related assets in the B&I practice
group. For the three months ended June 30, 2003, gain on sale of operations, net
was $1.8 million and related primarily to the sale of Health Administrative
Services (HAS) from the B&I practice group. A small business from the ATA
practice group was also sold during the second quarter of 2003.
20
CBIZ reported other income of $0.3 million for the three-month period ended June
30, 2004, compared to other expense of $17,000 for the comparable period in
2003, an increase $0.3 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 the second quarter of 2004 from the second
quarter of 2003 is primarily related to $0.4 million of impairment charges to
notes receivable during the second quarter of 2003 that did not recur in the
second quarter of 2004.
CBIZ recorded income tax expense from continuing operations of $1.3 million and
$2.6 million for the three-month periods ended June 30, 2004 and 2003,
respectively. The effective tax rate decreased to 33.8% for the three-month
period ended June 30, 2004, from 42.0% for the comparable period in 2003. The
effective tax rate for the quarter ended June 30, 2004 is lower than the
effective tax rate as applied to year to date income (40.3%) primarily due to
the realization in this quarter of the cumulative effects of a reduction in the
effective tax rate from the rate used for the quarter ended March 31, 2004
(41.8%).
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
ACCOUNTING, TAX AND ADVISORY SERVICES. The ATA group contributed approximately
$120.4 million and $119.0 million of revenue, or approximately 43.8% and 44.3%
of CBIZ's total revenue for the six months ended June 30, 2004 and 2003,
respectively. Acquisitions resulted in an increase in revenue of $3.5 million,
primarily related to Sarbanes-Oxley consulting services from the acquisition
CBIZ Harborview, offset by a decrease in revenue of $1.6 million resulting from
divestitures. For ATA businesses with a full period of operations for the six
months ended June 30, 2004 and 2003, same-unit revenue decreased approximately
$0.5 million, or 0.4% due to fewer hours charged to clients, as a result of
reduced headcount from a year ago. Gross margins decreased from 21.7% in 2003 to
20.8% in 2004 primarily due to the net decrease in same unit revenue and
increased facility and equipment costs associated with consolidations completed
in 2003.
BENEFITS AND INSURANCE SERVICES. The Benefits and Insurance group contributed
approximately $76.9 million and $78.4 million of revenue, or approximately 28.0%
and 29.2% of CBIZ's total revenue for the six months ended June 30, 2004 and
2003, respectively. Acquisitions accounted for an increase in revenue of $1.4
million, offset by a decrease in revenue of $5.5 million, related to the
divestiture of the Health Administration Services unit in May, 2003. For
Benefits and Insurance businesses with a full period of operations for the six
months ended June 30, 2004 and 2003, same-unit revenue increased $2.6 million,
or 3.6%, mainly due to higher commission bonus payments from carriers and
increased specialty life insurance sales. Gross margin for the Benefits and
Insurance group for the six months ended June 30, 2004 was 16.6% as compared to
19.9% for the six-months ended June 30, 2003.
The decline in gross margin is a result of additional investment in sales
personnel during 2004. CBIZ expects these investments in sales personnel to
result in margin improvement in future periods, once they have had time to
establish their productions levels. In addition, significant decline in gross
margin is attributable to one of the national businesses within the benefits and
insurance group. This unit has experienced significant growth over the last
several years, which has resulted in system, client service, and other
operational challenges as a result of the rapid growth. 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. Revenue adjustments resulting from higher policy terminations than
originally estimated, combined with higher expenses to support growth by this
unit resulted in a decrease in the gross margin of approximately $2.5 million.
NATIONAL PRACTICES SERVICES. The National Practices group contributed
approximately $77.5 million and $71.2 million of revenue, or approximately 28.2%
and 26.5% of CBIZ's total revenue for the six months ended June 30, 2004 and
2003, respectively.
CBIZ Medical Management Professionals (CBIZ MMP). CBIZ's medical practice
management unit, which is included in the results of the National Practices
group, contributed approximately $42.1 million and $36.2 million, or 15% and
14%, of CBIZ's total revenue for the six months ended June 30, 2004 and 2003,
respectively. CBIZ MMP's revenue growth of 16.0% is primarily attributable to
the addition of new clients obtained in the first six months of 2004 along with
the maturation of clients obtained in the fourth quarter of 2003. Gross margin
for CBIZ MMP for the six months ended June 30, 2004 was 16.3% as compared
to 16.2% for the six months ended June 30, 2003. The gross margins remained flat
as the investments in human capital discussed above were offset by stronger new
client sales and stronger existing client sales for the six months ended June
30, 2004 as compared
21
to the six months ended June 30, 2003.
National Practice Services - Other. The other units within the National
Practices group, excluding CBIZ MMP, contributed approximately $35.4 million and
$35.0 million of revenue, or approximately 12.9% and 13.0% of CBIZ's total
revenue for the six months ended June 30, 2004 and 2003, respectively. Same-unit
revenue increased $1.9 million and the acquisition of a technology business
accounted for $0.3 million of the increase. These increases were offset by a
decline in revenue of $1.8 million related to the closure of unprofitable
locations in the property tax and technology businesses during 2003.
Approximately $2.6 million of the same-unit revenue increase was attributed to
four transactions closed during the first six months of 2004 in CBIZ's mergers
and acquisition business. This increase was offset in part by lower revenues in
CBIZ's health care consulting and valuation businesses. Gross margin for
National Practices - Other for the six months ended June 30, 2004 was 11.0% as
compared to a loss of 2.6% for the six months ended June 30, 2003. The
improvement in gross margin is attributable to revenue associated with the
mergers and acquisitions business, combined with improvements and operational
efficiencies in the payroll, technology and valuation businesses.
Revenue
Total revenue for the six months ended June 30, 2004 was $274.8 million as
compared to $268.6 million for the six months ended June 30, 2003, representing
an increase of $6.2 million, or 2.3%. The increase in revenue attributable to
acquisitions completed subsequent to June 30, 2003 was $5.2 million, and was
offset by a decrease in revenue of $8.9 million due to divestitures completed
subsequent to June 30, 2003. For business units with a full period of operations
for the six months ended June 30, 2004 and 2003, revenue increased $9.9 million
or 3.8%. A more comprehensive analysis of revenue by each operating practice
group is discussed above.
Expenses
Operating expenses increased to $232.3 million for the six-month period ended
June 30, 2004, from $226.3 million for the comparable period in 2003, an
increase of $6.0 million or 2.7%. The primary components of operating expenses
are personnel costs and occupancy expense, representing 81.1% and 81.9% of total
operating expenses for the six months ended June 30, 2004 and 2003,
respectively.
The increase in operating expenses supported growth in revenue, remaining
relatively consistent as a percent of revenue at 84.2% and 84.0% (excluding
consolidation and integration charges) for the six-month periods ended June 30,
2004 and 2003, respectively. The slight increase in operating expenses as a
percent of revenue was a result of increases in professional fees and equipment
costs, offset by efficiencies gained in personnel costs. Professional fees
increased to 1.6% of total revenue for the six months ended June 30, 2004 from
1.1% for the comparable period in 2003, primarily driven by the acquisition of
two Accounting, Tax and Advisory firms in the second and third quarters of 2003,
which utilize external consultants to deliver services to clients. Equipment
expenses as a percent of revenue increased to .9% from .7% for the six months
ended June 30, 2004 and 2003, respectively, as the result of a shift from
purchasing computer-related items to leasing such items. Leasing costs are
reported as operating expenses, rather than capitalized and recorded as
depreciation. Personnel costs were $170.6 million or 62.1% of total revenue for
the six months ended June 30, 2004 and $168.1 million or 62.6% of total revenue
for the six months ended June 30, 2003. Personnel costs decreased as a percent
of revenue due to efficiencies gained through staff reductions in the ATA
practice group. Staff reductions were somewhat offset by added personnel in
wealth management to support revenue growth, and by annual merit increases in
compensation that occurred in April 2004.
Consolidation and integration charges are reported as operating expenses in the
accompanying consolidated financial statements, and increased as a percent or
revenue to 0.4% from 0.2% for the six months ended June 30, 2004 and 2003,
respectively. The increase in restructuring expenses occurred primarily as the
result of an adjustment to our estimated noncancellable lease obligations in the
second quarter of 2004.
Corporate general and administrative expenses increased to $11.4 million for the
six-month period ended June 30, 2004, from $9.7 million for the comparable
period in 2003. Corporate general and administrative expenses represented 4.2%,
and 3.6% of total revenues for the six-month periods ended June 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.
22
Depreciation and amortization expense decreased to $8.1 million for the
six-month period ended June 30, 2004, from $8.6 million for the comparable
period in 2003, a decrease of $0.5 million, or 5.3%. 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 $1.2
million for the six months ended June 30, 2004 and $0.6 million for the six
months ended June 30, 2003. As a percentage of total revenue, depreciation and
amortization expense was 3.0% for the six-month period ended June 30, 2004,
compared to 3.2% for the comparable period in 2003.
Interest expense increased to $0.7 million for the six-month period ended June
30, 2004, from $0.6 million for the comparable period in 2003, an increase of
$0.1 million, or 7.9%. The increase is the result of higher average debt during
the first half of 2004, of $33.6 million, compared to $15.0 million during the
first half of 2003. Higher debt in the first half 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 3.31% for the six months
ended June 30, 2004 from 4.17% for the six months ended June 30, 2003.
Additionally, interest expense for the first six months of 2003 included fees
related to an interest rate swap that was terminated during the third quarter of
2003.
Gain on sale of operations, net was $0.9 million for the six months ended June
30, 2004, and was related to the sale of and operation and three client lists in
the ATA practice group, and a client list in the B&I practice group. For the six
months ended June 30, 2003, gain on sale of operations, net was $1.8 million and
related primarily to the sale of Health Administrative Services (HAS) from the
B&I practice group. A small business from the ATA practice group was also sold
during the second quarter of 2003.
CBIZ reported other income of $0.8 million for the six-month period ended June
30, 2004, compared to other expense of $1.0 million for the comparable period in
2003, an increase $1.8 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 for the six months ended June
30, 2004 from the six months ended June 30, 2003 is primarily related to $2.0
million of impairment charges to notes receivable during the six months ended
June 30, 2003 that did not recur in 2004.
CBIZ recorded income taxes from continuing operations of $9.7 million for the
six months ended June 30, 2004, compared to $10.2 million for the six months
ended June 30, 2003. The effective tax rate decreased to 40.3% for the six month
period ended June 30, 2004, from 42.3% for the comparable period in 2003. The
effective tax rates for the six-months ended June 30, 2004 and 2003 are
generally in line with the statutory federal and state tax rates.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
During the second quarter of 2004, CBIZ adopted a formal plan to divest of a
firm in the National Practices practice group. This operation remains available
for sale at June 30, 2004, and is classified as a discontinued operation in the
accompanying financial statements. 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. These
operations have been classified as discontinued operations in accordance with
the adoption of Statement of Financial Accounting Standards (SFAS) 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and the net
assets, liabilities, and results of operations are reported separately in the
consolidated financial statements. At December 31, 2003, all operations
classified as discontinued operations had been sold or were in the process of
being closed.
Revenue associated with discontinued operations for the three and six-month
periods ended June 30, 2004 were $0.3 million and $0.6 million, and losses from
operations, net of tax were $0.2 million and $0.3 million, respectively. Revenue
associated with discontinued operations for the three and six-month periods
ended June 30, 2003 were $2.3 million and $4.8 million, and losses from
operations, net of tax were $0.2 million and $0.5 million, respectively.
23
FINANCIAL CONDITION
Total assets were $411.2 million, total liabilities were $157.9 million and
shareholders equity was $253.3 million as of June 30, 2004. Current assets of
$186.2 million exceeded current liabilities of $104.9 million by $81.3 million.
Cash and cash equivalents increased $0.5 million to $4.3 million for the quarter
ended June 30, 2004. Restricted cash was $12.5 million at June 30, 2004, an
increase of $1.7 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 $118.5 million at June 30, 2004, an increase of
$7.3 million from December 31, 2003. The increase in accounts receivable is
attributed to the seasonal increase in revenue during the first four months of
the year, primarily driven by tax services provided by the ATA practice group.
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 82 days at December 31, 2003 to 79 days at June
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
$4.1 million from December 31, 2003. Acquisitions, including contingent
consideration earned, resulted in a $5.2 million increase in intangibles in the
first and second quarters of 2004. In addition, intangibles decreased by $1.1
million as a result of divestitures completed during the six months ended June
30, 2004, and amortization expense for client lists and other intangibles.
Other current assets increased $2.1 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 $2.6
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 $28.6 million at June 30, 2004, reflects amounts
due to suppliers and vendors; balances fluctuate during the year based on the
timing of cash payments. Accrued expenses - current increased $1.3 million to
$35.6 million at June 30, 2004, as the result of increases in unearned revenue
(primarily retainers received at the beginning of the year and amortized
throughout the year), contingent consideration earned in connection with various
acquisitions, and capitalized furniture and equipment leases in connection with
consolidation activities in Kansas; increases were offset by incentive
compensation which was accrued at December 31, 2003 and paid in the first
quarter of 2004. The increase in income taxes payable to $4.1 million at June
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 $36.2 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 $32.8 million
to $46.8 million at June 30, 2003 from December 31, 2003, driven primarily by
stock repurchases made during the second quarter of 2004. Accrued expenses -
non-current increased $4.3 million due to the deferred compensation plan as
described above, and capitalized furniture and equipment leases in connection
with consolidation activities in Kansas City.
24
LIQUIDITY AND CAPITAL RESOURCES
CBIZ's bank line of credit is a $73.0 million revolving credit facility with
Bank of America as the agent bank. The credit facility carries an option to
increase the total commitment to $80.0 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 its acquisition program. The facility has a
three-year term with an expiration date of September 2005. CBIZ is currently in
compliance with all covenants under its credit facility. Effective August 9,
2004, the Company modified its credit facility with the banks. See Note 12 to
CBIZ's consolidated financial statements included herewith for additional
information regarding the new credit facility.
At June 30, 2004, CBIZ had $46.8 million outstanding under its credit facility,
leaving approximately $11.9 million of available funds under the facility based
on the borrowing base calculation. Management believes that those available
funds, along with cash generated from operations, will be sufficient to meet its
liquidity needs in the foreseeable future, including the funding to repurchase
up to 10.5 million shares of its outstanding common stock, approximately 8.0
million of which were purchased during the three months ended June 30, 2004, as
authorized by its Board of Directors on March 3, 2004 and supplemented on May
27, 2004. See Notes 4 and 12 to CBIZ's consolidated financial statements
included herewith for additional information regarding the credit facility.
SOURCES AND USES OF CASH
Cash provided by operating activities and funds available from CBIZ's credit
facility provide the resources to support current operations, projected growth,
acquisitions, capital expenditures, and share repurchases. Net cash provided by
continuing operating activities was $10.7 million for the six months ended June
30, 2004, compared to $18.5 million for the same period in 2003. In comparison
to 2003, the resulting decrease in cash provided by continuing operating
activities during 2004 was primarily a result of the change in net working
capital. 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 six months ended June 30, 2004
of $3.3 million primarily consisted of $4.1 million used for capital
expenditures and approximately $3.3 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 the divestiture of a business unit and
various client lists, and $1.1 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 the growth of the medical practice management
unit and equipment purchases in relation to normal replacement. Net cash used in
investing activities during the six months ended June 30, 2003 of $2.9 million
primarily consisted of $5.1 million used for capital expenditures, and $1.9
million used toward acquisitions and contingent consideration earned from
previously acquired businesses, and was offset by cash provided through
divestitures of $3.8 million and $0.3 million from the collections of notes
receivables related primarily to divestitures.
Net cash used in financing activities was $6.6 million during the six months
ended June 30, 2004. During the same period in 2003, net cash used in investing
activities was $18.4 million. Proceeds from bank debt and net cash provided by
operating activities were the primary sources used to fund the repurchase of
$39.8 million of CBIZ capital stock during 2004. During the six months ended
June 30, 2003, cash provided by operating activities was the primary source of
paying down the remaining $17.5 million of bank debt and effectively eliminating
bank debt at June 30, 2003.
25
A summary of CBIZ's contractual obligations remaining as of June 30, 2004 is as
follows (in thousands):
FISCAL YEAR ENDING
----------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
ON-BALANCE SHEET
Bank debt(2) ................. $ 46,825 $ -- $ 46,825 $ -- $ -- $ -- $ --
Notes payable and
capitalized leases ........ 5,136 2,848 752 431 409 696 --
Non-cancelable operating
lease obligations ......... 186,368 15,936 27,673 23,710 20,110 18,296 80,643
Restructuring lease
obligations(1) ............ 9,994 1,664 2,235 2,094 2,019 1,311 671
OFF-BALANCE SHEET
Letters of credit ............ 2,771 2,127 314 -- -- -- 330
Performance guarantees for
non-consolidated affiliates 1,109 705 404 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total ...................... $252,203 $ 23,280 $ 78,203 $ 26,235 $ 22,538 $ 20,303 $ 81,644
======== ======== ======== ======== ======== ======== ========
(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 $1.1 million and $0.7 million at June 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 June 30, 2004, we were not
aware of any indemnification agreements that would require material payments.
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 six
26
months ending June 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.
- Contingent commissions are recognized at the earlier of notification
that the contingency has been satisfied 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.
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
27
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 six months
ended June 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 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.
28
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
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments".
EITF 03-1 includes new guidance for evaluating and recording impairment losses
on debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. The impairment
evaluation and recognition guidance of EITF 03-1 is to be applied prospectively
and is effective for reporting periods beginning after June 15, 2004; the
additional disclosure requirements are effective for annual periods ending after
June 15, 2004. Although the Company will continue to evaluate the application of
EITF 03-1, management does not currently believe adoption will have a material
impact on its results of operations or financial position.
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 June 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.
29
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.
The Company experienced operational challenges due to rapid growth in one of its
national insurance units. Accordingly, additional resources are being deployed
to improve controls at this unit. A more detailed description is provided under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," under Item 2 or this Form 10-Q.
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 relating to CBIZ is
made known to management on a timely basis during the period when our periodic
reports are being prepared.
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.
30
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 expects that this opinion and order will end proceedings in this case,
although further appeal technically is permissible.
The Company is a defendant in the case In Re Heritage Bond Litigation,
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 this case, 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.
On April 22, 2004, the Magistrate Judge handling discovery issues in the case
entered an order treating CBIZ Valuation as if it had admitted certain facts as
a result of the failure by the Company's former outside counsel handling the
case to timely file a discovery response. This law firm did not inform the
Company or its subsidiary that it had missed the discovery response filing
deadline or that the April 22nd order had been entered against the Company's
subsidiary.
The Company retained Irell & Manella LLP to represent its subsidiaries in
connection with this case going forward. On June 28, 2004, following a hearing
before U.S. District Court Judge Dickran Tevrizian, the Court granted the motion
of CBIZ Valuation to reconsider and set aside the Magistrate Judge's earlier
order. The admissions have been withdrawn and CBIZ Valuation has filed a proper
response to the requests for admissions. Although the Company cannot predict the
outcome of this case, the Company continues to believe that it has a strong
defense to the claims against its subsidiaries.
The Company has received from the plaintiffs offers and demands to settle these
suits for approximately $13.0 million. Discovery in these matters currently is
set to continue through August 2004. Although the ultimate disposition of this
proceeding is not presently determinable, management continues to believe that
the ultimate resolution of this matter 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.
31
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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
April 1 - April 30, 2004(2)(3) 7,500,000 $5.04 7,500,000 1,000,000
May 1 - May 31, 2004(4) ...... 396,500 $4.21 396,500 2,603,500
June 1 - June 30, 2004(4) .... 67,266 $4.30 67,266 2,536,234
--------- ----- ---------
Total ........................ 7,963,766 $4.99 7,963,766
========= ===== =========
(1) Average price paid per share includes fees and commissions.
(2) Shares were repurchased at a price of $5.00 per share under a tender
offer that was concluded on April 1, 2004.
(3) Excludes 30,000 shares that were returned to treasury stock as
proceeds from the sale of a divested business.
(4) Open market repurchases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Listed below are the results of matters that were submitted to vote at the
Annual Meeting of Stockholders held on May 27, 2004:
1) Election of the following individuals to the Board of Directors to serve
until the 2007 Annual Meeting of Stockholders:
Authority Granted Authority Withheld
----------------- ------------------
Rick L. Burdick 50,716,004 10,439,320
Steven L. Gerard 59,858,028 1,297,296
2) Ratification of the appointment of KPMG LLP as independent accountants for
fiscal year 2004:
Shares For Shares Against Abstained
---------- -------------- ---------
60,475,382 642,755 37,187
32
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.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the three
months ended June 30, 2004:
On May 3, 2004, CBIZ furnished a current report on Form 8-K to provide
investors with its financial results for the first quarter ended March
31, 2004, as released to the public and discussed on a conference call
on April 27, 2004.
On May 24, 2004, CBIZ filed a current report on Form 8-K to provide
investors with information regarding the status of a legal case in
which CBIZ is the defendant.
On June 1, 2004, CBIZ filed a current report on Form 8-K to inform
investors that CBIZ's Board of Directors authorized a stock repurchase
of up to 2,000,000 shares, which supplements the Company's repurchase
plan previously announced on March 4, 2004. Under the repurchase plan,
the Company seeks to buy 10,500,000 shares of its common stock during
2004.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Business Services, Inc.
-------------------------------
(Registrant)
Date: August 9, 2004 By: /s/ WARE H. GROVE
------------------- --------------------------
Ware H. Grove
Chief Financial Officer
34
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF CENTURY BUSINESS SERVICES, INC.
I, Steven L. Gerard, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century Business
Services, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 9, 2004 /s/ Steven L. Gerard
-------------------------------
Steven L. Gerard
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF CENTURY BUSINESS SERVICES, INC.
I, Ware H. Grove, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century Business
Services, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 9, 2004 /s/ Ware H. Grove
---------------------------
Ware H. Grove
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF CENTURY BUSINESS SERVICES, INC.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q for the quarter ended
June 30, 2004 (the "Form 10-Q") of Century Business Services, Inc. (the
"Issuer").
I, Steven L. Gerard, the Chief Executive Officer of the Issuer, certify that to
the best of my knowledge:
(i) the Form 10-Q fully complies with the requirements of Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(ii) the information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of
operations of the Issuer.
Date: August 9, 2004 /s/ Steven L. Gerard
--------------------------
Steven L. Gerard
Chief Executive Officer
Subscribed and sworn to before me This 9th day of August, 2004.
/s/ Michael W. Gleespen
- ------------------------------------
Name: Michael W. Gleespen
Title: Notary Public & Attorney-At-Law
Registered in Franklin County, Ohio
No Expiration Date
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF CENTURY BUSINESS SERVICES, INC.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q for the quarter ended
June 30, 2004 (the "Form 10-Q") of Century Business Services, Inc. (the
"Issuer").
I, Ware H. Grove, the Chief Financial Officer of the Issuer, certify that to the
best of my knowledge:
(i) the Form 10-Q fully complies with the requirements of Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(ii) the information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of
operations of the Issuer.
Date: August 9, 2004 /s/ Ware H. Grove
-----------------------
Ware H. Grove
Chief Financial Officer
Subscribed and sworn to before me this 9th day of August, 2004.
/s/ Michael W. Gleespen
- ------------------------------------
Name: Michael W. Gleespen
Title: Notary Public & Attorney-At-Law
Registered in Franklin County, Ohio
No Expiration Date
