CBZ

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for Century Business Services, Inc. (CBIZ), a diversified services company providing outsourced business services including accounting, tax, benefits, insurance, and consulting. The filing reflects the adoption of SFAS No. 142 (Goodwill and Other Intangibles) effective January 1, 2002, which ceased goodwill amortization and triggered a significant impairment charge.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Revenue decreased 0.6% ($0.7 million) for the quarter and 5.3% ($21.5 million) for the nine months compared to 2001. This decline is primarily attributed to divestitures of non-core businesses ($3.3 million for the quarter; $22.2 million for the nine months), partially offset by organic growth in same-unit revenue.
• Profitability: The company reported a net loss of $75.1 million for the nine months ended September 30, 2002, compared to net income of $2.2 million in the prior year. This is driven by a one-time, non-cash goodwill impairment charge of $79.4 million (net of tax) recorded as a cumulative effect of a change in accounting principle.
• Operating Expenses: Operating expenses decreased 2.5% for the quarter and 1.3% for the nine months. This reduction is due to divestitures of low-margin businesses and expense reduction initiatives, offset by severance costs and inventory write-downs.
• Depreciation & Amortization: Expenses dropped significantly (46.8% for the quarter; 49.2% for the nine months) due to the cessation of goodwill amortization under SFAS 142.
• Debt Reduction: Bank debt was reduced by $30.0 million during the nine-month period, bringing the outstanding balance to $25.0 million from $55.0 million at year-end 2001.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue reducing the outstanding balance on the credit facility using cash generated from operations. The company entered into a new $73.0 million senior secured credit agreement in September 2002 to fund working capital, internal growth, and acquisitions.
• Unusual Items:
  • Goodwill Impairment: A $88.6 million pre-tax charge was recorded in Q2 2002 upon adoption of SFAS 142.
  • Investment Write-downs: A $2.4 million charge was recorded for the write-down of notes and investments in high-tech start-up ventures.
  • Discontinued Operations: The company recorded a loss on disposal of discontinued operations of $3.1 million (net of tax) for the nine months, related to the divestiture of non-core units.
• Risks:
  • Legal Proceedings: An appeal is pending regarding the dismissal of consolidated stockholder class-action lawsuits filed in 1999. Management does not believe the outcome will have a material adverse effect.
  • Investment Valuation: Investments in privately held start-up companies are subject to market risk and potential further impairment.
  • Interest Rate Risk: Floating rate debt exposes the company to interest rate fluctuations, partially mitigated by an interest rate swap agreement.

Investor Verification Checklist

• Goodwill Impairment Impact: Verify the non-cash nature of the $79.4 million net impairment charge and its exclusion from adjusted earnings metrics.
• Divestiture Strategy: Confirm the strategic rationale for closing or selling 15 business units in the first nine months of 2002 and the associated gains/losses.
• Cash Flow Sustainability: Assess the ability to service the new $73.0 million credit facility and maintain covenant compliance (tangible net worth, leverage ratio, fixed charge coverage).
• Investment Portfolio: Review the status of high-tech start-up investments that incurred a $2.4 million write-down to gauge future impairment risks.
• Legal Contingencies: Monitor the status of the appealed securities litigation to ensure no material liability emerges.