CBZ

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Century Business Services, Inc. (CBIZ). The company provides professional services through three primary operating groups: Accounting, Tax and Advisory (ATA); Benefits and Insurance; and National Practices (including Medical Practice Management). The filing includes unaudited consolidated financial statements and management's discussion and analysis.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 0.7% ($0.9 million) for the quarter and 1.9% ($5.0 million) for the six months compared to the prior year. Growth was driven by acquisitions ($2.3 million for the quarter; $4.5 million for six months) offset by divestitures.
• Profitability: Net income for the six months ended June 30, 2003, was $13.2 million, a significant improvement from a net loss of $69.6 million in the same period in 2002. The 2002 loss included a one-time $80.0 million non-cash charge for the cumulative effect of a change in accounting principle (SFAS 142 goodwill impairment).
• Debt Reduction: CBIZ completely paid down its bank debt, reducing the balance from $17.5 million at December 31, 2002, to $0 at June 30, 2003. Consequently, interest expense decreased by 54.5% for the quarter and 57.9% for the six months.
• Divestitures: The company sold two businesses in Q2 2003 (Health Administrative Services and a 401(k) recordkeeping business) for $4.2 million, resulting in a $1.8 million pretax gain.
• Segment Performance: The Medical Practice Management unit saw revenue growth of 12.2% due to new clients and market expansion. Conversely, the "Other" National Practices units saw a revenue decline primarily in mergers and acquisitions and valuation businesses.

Guidance, Outlook, and Risks

• Capital Allocation: In July 2003 (subsequent to the reporting period), CBIZ completed a modified Dutch Auction tender offer, repurchasing approximately 9.9 million shares for $32.8 million. The company has authorization to repurchase up to 15 million shares by December 31, 2003.
• Liquidity: Management believes cash generated from operations and the $60.0 million available under its credit facility are sufficient to meet liquidity needs, fund acquisitions, and support capital expenditures.
• Acquisitions: The company continues its acquisition strategy, completing two additional acquisitions in July 2003 for approximately $2.0 million.
• Risks and Contingencies:
  • Legal Proceedings: CBIZ is subject to ordinary course claims and suits. Management does not believe the ultimate resolution will have a material adverse effect, though a favorable judgment in April 2003 led to reserve adjustments.
  • Investment Valuation: Investments in privately held start-up companies are included in "other assets" and are subject to impairment risk if market conditions deteriorate.
  • Key Personnel: The company notes dependence on its CEO and other key employees.
• Accounting Changes: The company adopted SFAS 146 (Exit Costs) and SFAS 148 (Stock-Based Compensation disclosures) effective January 1, 2003, with no material impact on results. FIN 46 (Variable Interest Entities) was adopted for disclosure purposes in Q2 2003.

Investor Verification Checklist

• Verify the sustainability of the $1.8 million gain on divestitures, as this is a non-recurring item impacting net income.
• Monitor the execution of the share repurchase program and its impact on future liquidity and leverage ratios.
• Review the performance of the Medical Practice Management segment, which is a primary growth driver, against the declining "Other" National Practices segment.
• Assess the adequacy of the allowance for doubtful accounts given the $16.4 million increase in accounts receivable since year-end 2002.
• Confirm compliance with credit facility covenants, specifically the minimum net worth test and leverage ratios, following the recent debt paydown and stock repurchases.