CBZ

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for Century Business Services, Inc. (CBIZ). The company provides professional services through three primary practice 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

Note: Q1 2002 Net Income included a one-time cumulative effect of a change in accounting principle (SFAS 142) resulting in an $80.0 million net-of-tax impairment charge on goodwill.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 2.9% year-over-year. This was driven by a 5.2% same-unit revenue increase in the Benefits and Insurance group and a 16.4% increase in the Medical Practice Management unit. These gains were partially offset by a 1.6% decrease in same-unit revenue for the ATA group due to weak economic conditions and weather-related office closures.
• Profitability: Operating income rose 9.9% to $18.7 million. The significant improvement in Net Income compared to the prior year is primarily due to the absence of the $80.0 million goodwill impairment charge recorded in Q1 2002.
• Expense Management: Operating expenses increased 2.3% to $118.1 million. Excluding consolidation charges of $2.1 million in 2002, operating expenses as a percentage of revenue improved slightly from 79.7% to 80.4%.
• Debt Reduction: Bank debt outstanding decreased to $17.0 million from $17.5 million at year-end 2002. The average outstanding debt for the quarter was significantly lower than the prior year ($19.4 million vs. $53.5 million), reducing interest expense by 60.5%.

Outlook, Risks, and Unusual Items

• Acquisitions: CBIZ completed the acquisition of a benefits and insurance firm in Boca Raton, Florida, in January 2003 for approximately $1.2 million. A subsequent acquisition of an accounting firm in Huntington Beach, California, was completed in May 2003 for $2.1 million.
• Discontinued Operations: One business unit remains classified as held for sale. Revenue from discontinued operations was minimal ($0.6 million) compared to the prior year ($2.0 million).
• Liquidity: The company maintains a $73.0 million revolving credit facility with approximately $49.0 million available as of March 31, 2003. Management believes cash flows and available credit are sufficient for foreseeable needs.
• Risks: Key risks include dependence on key employees, competitive pricing pressures, general economic conditions, and the collectibility of accounts receivable. The company also faces potential valuation risks regarding investments in privately held start-up companies.
• Unusual Items: Other income/expense included a $1.6 million impairment charge on notes receivable related to a 1997 divestiture and adjustments to legal reserves.

Investor Verification Checklist

• Goodwill Impairment: Verify the impact of the $80.0 million non-cash charge in 2002 to ensure accurate year-over-year profitability comparisons.
• Accounts Receivable: Review the $24.7 million increase in net receivables ($127.7 million total) to assess collection risks and seasonality impacts from tax services.
• Debt Covenants: Confirm continued compliance with financial covenants (tangible net worth, leverage ratio, fixed charge coverage) under the $73 million credit facility.
• Segment Performance: Analyze the divergence between the ATA segment (revenue decline) and the Benefits/Insurance and Medical Practice segments (revenue growth) to understand future revenue mix.
• Legal Contingencies: Monitor the status of ongoing legal proceedings and the adequacy of recorded reserves, noting recent favorable judgments.