CBZ

SEC Filing Summary: Century Business Services, Inc. (CBIZ)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2002. CBIZ is a diversified services company providing professional outsourced business services to small and medium-sized businesses, individuals, and governmental entities. Operations are organized into three practice groups: Accounting, Tax and Advisory (ATA); Benefits and Insurance; and National Practices (which includes Medical Practice Management). The company operates through 59 business units with over 160 offices across 33 U.S. states and Toronto, Canada.

Key Financial Metrics

Segment Revenue (2002): ATA ($209.9M, 42%); Benefits & Insurance ($150.5M, 30%); National Practices ($143.9M, 29%).

Material Changes vs. Prior Period

• Accounting Change Impact: The reported Net Loss of $76.8 million was primarily driven by a non-cash, one-time charge of $80.0 million (net of tax) representing the cumulative effect of adopting SFAS No. 142 (Goodwill and Other Intangible Assets). This standard eliminated goodwill amortization but required an impairment test, resulting in an $88.6 million pre-tax impairment charge.
• Revenue Decline: Total revenue decreased 2.4% to $504.3 million. This decline was due to divestitures of $24.1 million and a weak economy reducing demand for discretionary consulting. However, same-unit revenue increased 2.3%.
• Operating Efficiency: Operating income improved significantly to $18.3 million from $8.9 million in 2001, despite lower revenue. This was achieved through the divestiture of low-margin businesses, expense reductions (compensation down $8.0 million), and a 49% reduction in depreciation and amortization due to the cessation of goodwill amortization.
• Debt Reduction: Bank debt was reduced by $37.5 million to $17.5 million, utilizing strong operating cash flows.

Guidance, Outlook, and Risks

Outlook: Management expects modest revenue growth and margin improvement in 2003. The company plans to continue rationalizing operations by divesting non-strategic units and selectively acquiring businesses in target markets to enhance cross-serving capabilities. Capital expenditures for 2003 are projected at approximately $7.5 million.

Risks and Contingencies:

• Legal Proceedings: A consolidated stockholder class-action lawsuit regarding goodwill amortization and operating results was dismissed with prejudice in June 2002 but remains under appeal. Management does not believe the outcome will have a material adverse effect.
• Regulatory Compliance: The company is subject to the Sarbanes-Oxley Act of 2002 and HIPAA regulations. Independence rules regarding relationships with CPA firms may limit service offerings to certain SEC-reporting clients.
• Market Sensitivity: A significant portion of operating expenses are fixed, making the company sensitive to revenue fluctuations. Economic weakness may cause clients to defer outsourcing services.

Investor Verification Checklist

• Goodwill Impairment: Verify the sustainability of earnings by excluding the $80.0 million non-cash accounting change charge; pro forma net income from continuing operations was $7.6 million.
• Divestiture Strategy: Monitor the completion of the sale of the remaining discontinued operation and the impact of future divestitures on revenue and gains/losses.
• Credit Facility Covenants: Confirm continued compliance with the new $73 million credit facility covenants (minimum tangible net worth, leverage ratio, fixed charge coverage) to ensure access to liquidity for acquisitions.
• Seasonality: Note that approximately 44% of ATA revenue is generated in the first four months of the year, creating significant quarterly earnings volatility.
• Legal Appeal: Track the status of the Sixth Circuit Court of Appeals decision regarding the dismissed securities litigation.