CBZ

Business Context and Reporting Period

Company: Century Business Services, Inc. (CBIZ, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: CBIZ provides professional outsourced business services, including accounting, tax, employee benefits, wealth management, insurance, and consulting, primarily to small and medium-sized companies in the United States.

Key Financial Metrics

Note: The reported Net Loss for the six months ended June 30, 2002, includes a non-cash cumulative effect of a change in accounting principle of $79.4 million (net of tax) related to goodwill impairment.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 3.5% ($4.6 million) for the quarter and 7.6% ($22.3 million) for the six-month period compared to 2001. This was primarily due to divestitures of non-core businesses ($5.2 million impact for the quarter) and weak economic conditions affecting consulting work.
• Goodwill Impairment: Upon adopting SFAS No. 142, CBIZ ceased goodwill amortization but recorded a one-time non-cash impairment charge of $88.6 million (pre-tax) during the second quarter. This charge drove the reported net loss for the six-month period.
• Expense Management: Operating expenses increased slightly for the quarter but decreased for the six-month period. Depreciation and amortization expenses dropped significantly (approx. 50%) due to the cessation of goodwill amortization.
• Debt Reduction: Bank debt was reduced by $22.0 million during the six-month period, bringing the outstanding balance to $33.0 million from $55.0 million at year-end 2001.
• Divestitures: The company sold six non-core operations in Q1 2002 and one in Q2 2002, generating a net pre-tax gain of $1.1 million for the six-month period.

Guidance, Outlook, and Risks

• Outlook: Management expects to realize the full impact of recent expense reductions and consolidation activities in the third quarter of 2002. They anticipate that cash generated from operations and the remaining credit facility capacity will meet liquidity needs.
• Restructuring: CBIZ initiated expense reductions in Q2, incurring severance and restructuring costs of $1.2 million for the quarter and $3.3 million for the six months.
• Legal Contingencies: A consolidated stockholder class-action lawsuit regarding goodwill amortization and operating results was dismissed by the U.S. District Court, though plaintiffs have indicated an intent to appeal. Management does not believe this will have a material adverse effect.
• Market Risk: The company is exposed to interest rate risk on its variable-rate debt. A 100 basis point change in rates would impact annual interest expense by approximately $0.3 million. An interest rate swap ($25 million notional) is in place to hedge this risk.
• Credit Facility: The revolving credit facility is $75.0 million, with a planned commitment reduction to $60.0 million by September 30, 2002.

Investor Verification Checklist

• Adjusted Earnings: Verify the "Net income, as adjusted" figures ($10.4 million for six months ended June 30, 2002) which exclude the goodwill impairment charge to assess core operational performance.
• Goodwill Valuation: Review the remaining goodwill balance of $155.8 million and the methodology used for the SFAS 142 impairment test.
• Divestiture Proceeds: Confirm the utilization of proceeds from the $5.7 million (Q1) and $1.2 million (Q2) divestitures, primarily used to reduce bank debt.
• Restructuring Costs: Monitor the realization of cost savings from the $3.3 million in restructuring charges incurred in the first half of 2002.
• Legal Appeal Status: Track the status of the appeal regarding the dismissed securities class-action lawsuit.