UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-25890 CENTURY BUSINESS SERVICES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 22-2769024 - --------------------------------------------- --------------------------- (State or Other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification No.) 6480 Rockside Woods Boulevard South, Suite 330, Cleveland, Ohio 44131 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (Registrant's Telephone Number, Including Area Code) 216-447-9000 --------------------------- - -------------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, if Changed since Last Report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Outstanding at Class of Common Stock July 31, 2003 --------------------- ---------------- Par value $.01 per share 86,136,262
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION: Page Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2003 and December 31, 2002 3 Consolidated Statements of Operations - Three and Six Months Ended June 30, 2003 and 2002 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002 5 Notes to the Consolidated Financial Statements 6-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-22 Item 3. Quantitative and Qualitative Information about Market Risk 22 Item 4. Controls and Procedures 22-23 PART II. OTHER INFORMATION: Item 4. Submission of Matters to a Vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 2
PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) JUNE 30, DECEMBER 31, 2003 2002 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 6,444 $ 6,351 Restricted cash 12,509 16,980 Accounts receivable, net 119,364 102,982 Notes receivable - current 3,207 2,029 Income taxes recoverable - 4,957 Deferred income taxes 3,908 3,567 Other current assets 8,302 7,098 Assets of businesses held for sale 10,054 9,566 --------- --------- Current assets before funds held for clients 163,788 153,530 Funds held for clients 32,902 49,217 --------- --------- Total current assets 196,690 202,747 Property and equipment, net 41,505 44,600 Notes receivable - non-current 4,396 7,585 Deferred income taxes - non-current 10,637 10,580 Goodwill and other intangible assets, net 164,633 163,706 Other assets 3,532 3,893 --------- --------- Total assets $ 421,393 $ 433,111 ========= ========= LIABILITIES Current liabilities: Accounts payable $ 27,718 $ 22,548 Income taxes payable 7,369 - Other current liabilities 32,243 37,687 Liabilities of businesses held for sale 6,956 6,905 --------- --------- Current liabilities before client fund obligations 74,286 67,140 Client fund obligations 32,902 49,217 --------- --------- Total current liabilities 107,188 116,357 Bank debt - 17,500 Other non-current liabilities 5,723 4,936 --------- --------- Total liabilities 112,911 138,793 --------- --------- STOCKHOLDERS' EQUITY Common stock 954 951 Additional paid-in capital 440,344 439,684 Accumulated deficit (131,506) (144,754) Treasury stock (1,308) (1,308) Accumulated other comprehensive loss (2) (255) --------- --------- Total stockholders' equity 308,482 294,318 Commitments and contingencies --------- --------- Total liabilities and stockholders' equity $ 421,393 $ 433,111 ========= ========= See the accompanying notes to the consolidated financial statements. 3
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) --------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Revenue $ 126,080 $ 125,163 $ 272,375 $ 267,367 Operating expenses 112,489 112,128 230,550 227,522 --------- --------- --------- --------- Gross margin 13,591 13,035 41,825 39,845 Corporate general and administrative 4,772 5,159 10,021 10,029 Depreciation and amortization 4,350 5,007 8,647 9,938 --------- --------- --------- --------- Operating income 4,469 2,869 23,157 19,878 Other income (expense): Interest expense (297) (653) (620) (1,471) Gain on sale of operations, net 1,784 86 1,784 1,110 Other income (expense), net (155) 1,104 (693) 1,606 --------- --------- --------- --------- Total other income, net 1,332 537 471 1,245 Income from continuing operations before income tax expense 5,801 3,406 23,628 21,123 Income tax expense 2,468 1,452 10,043 9,085 --------- --------- --------- --------- Income from continuing operations 3,333 1,954 13,585 12,038 Income (loss) from operations of discontinued businesses, net of tax 97 74 (154) (366) Loss on disposal of discontinued businesses, net of tax (183) (892) (183) (1,236) --------- --------- --------- --------- Income before cumulative effect of change in accounting principle 3,247 1,136 13,248 10,436 Cumulative effect of a change in accounting principle, net of tax - - - (80,007) --------- --------- --------- --------- Net income (loss) $ 3,247 $ 1,136 $ 13,248 $ (69,571) ========= ========= ========= ========= Earnings (loss) per share: Basic: Continuing operations $ 0.04 $ 0.02 $ 0.14 $ 0.13 Discontinued operations (0.01) (0.01) - (0.02) Cumulative effect of change in accounting principle - - - (0.84) --------- --------- --------- --------- Net income (loss) $ 0.03 $ 0.01 $ 0.14 $ (0.73) ========= ========= ========= ========= Diluted: Continuing operations $ 0.03 $ 0.02 $ 0.14 $ 0.12 Discontinued operations - (0.01) - (0.02) Cumulative effect of change in accounting principle - - - (0.82) --------- --------- --------- --------- Net income (loss) $ 0.03 $ 0.01 $ 0.14 $ (0.72) ========= ========= ========= ========= Basic weighted average shares outstanding 95,138 95,005 95,112 94,945 ========= ========= ========= ========= Diluted weighted average shares outstanding 97,178 97,595 97,073 97,349 ========= ========= ========= ========= See the accompanying notes to the consolidated financial statements. 4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ------------------------- 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 13,248 $(69,571) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operations 154 366 Loss on divestiture of discontinued operations 183 1,236 Gain on divested operations (1,784) (1,110) Bad debt expense, net of recoveries 2,418 3,746 Impairment of notes receivable 2,014 - Cumulative effect of change in accounting principle - 80,007 Depreciation and amortization 8,647 9,938 Deferred income taxes (398) (2,547) Changes in assets and liabilities, net of acquisitions and dispositions: Restricted cash 4,339 5,169 Accounts receivable, net (19,249) (4,172) Other assets (1,507) (4,110) Accounts payable 5,472 2,026 Income taxes 12,488 7,086 Accrued expenses and other liabilities (5,916) (4,000) -------- -------- Net cash provided by continuing operations 20,109 24,064 Net cash provided by discontinued operations 1,031 478 -------- -------- Net cash provided by operating activities 21,140 24,542 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired and contingent consideration (1,553) - Proceeds from divested operations 3,843 3,622 Additions to property and equipment, net (5,180) (6,341) Net decrease in notes receivable 272 683 -------- -------- Net cash used in investing activities (2,618) (2,036) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank debt 76,250 14,000 Proceeds from notes payable and capitalized leases 58 265 Payment of bank debt (93,750) (36,000) Payment of notes payable and capitalized leases (1,128) (739) Proceeds from exercise of stock options and warrants 141 532 -------- -------- Net cash used in financing activities (18,429) (21,942) -------- -------- Net decrease in cash and cash equivalents 93 564 Cash and cash equivalents at beginning of year 6,351 4,340 -------- -------- Cash and cash equivalents at end of year $ 6,444 $ 4,904 ======== ======== See the accompanying notes to the consolidated financial statements. 5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly the financial position of Century Business Services, Inc. and Subsidiaries (CBIZ) as of June 30, 2003 and December 31, 2002, and the results of their operations for the three and six months ended June 30, 2003 and 2002, and cash flows for the six months ended June 30, 2003 and 2002. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and the instructions to Form 10-Q, and accordingly do not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and footnotes thereto included in CBIZ's annual report on Form 10-K for the year ended December 31, 2002. Also, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of critical accounting policies. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to the 2002 consolidated financial statements to conform to the 2003 presentation. New Accounting Pronouncements Effective January 1, 2003, CBIZ adopted Statement of Financial Accounting Standards (SFAS) 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when costs are incurred rather than at the date of a commitment to an exit or disposal plan. The implementation of SFAS 146 did not have a material impact on CBIZ's results of operations, financial position or cash flows. Effective January 1, 2003, CBIZ adopted SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosures," an amendment to SFAS 123, "Accounting for Stock-Based Compensation." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. CBIZ has elected not to voluntarily change to the fair value based method of accounting for stock options, but has adopted the disclosure requirements. See Note 7 for the applicable disclosures. Effective January 1, 2003, CBIZ adopted Financial Interpretation 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The implementation of the accounting pronouncement did not have a material impact on CBIZ's results of operations, financial position, or cash flows. In January 2003, the FASB issued Interpretation 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 addresses the consolidation of variable interest entities (VIEs) that have the characteristics of equity investments at risk not sufficient to permit the entity to finance its activities without additional financial support from other parties, or VIEs in which the equity investor lacks essential characteristics of a controlling financial interest. The consolidation requirements of FIN 46 apply immediately to VIE's created after January 31, 2003. The consolidation requirements apply to entities existing prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003 regardless of when the VIE was established. CBIZ has adopted the disclosure provisions and the consolidation requirements, where applicable, on July 1, 2003. In January 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative 6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) Instruments and Hedging Activities." The Statement will improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly, and will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This Statement is effective for contracts entered into or modified after June 30, 2003. CBIZ does not believe this Statement will have a material impact on is financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement affects the accounting for three types of freestanding financial instruments that could previously be accounted for as equity: mandatorily redeemable shares; put options and forward purchase contracts; and obligations that can be settled with shares. This Statement is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective July 1, 2003. CBIZ does not believe this Statement will have a material impact on is financial position, results of operations, or cash flows. 2. ACCOUNTS RECEIVABLE Accounts receivable balances were as follows (in thousands): JUNE 30, 2003 DECEMBER 31, 2002 --------------- ------------------- Trade accounts receivable ...................................... $ 91,917 $ 82,694 Unbilled revenues .............................................. 37,520 29,123 -------- ---------- Total accounts receivable ...................................... 129,437 111,817 Less allowance for doubtful accounts ........................... (10,073) (8,835) -------- ---------- Accounts receivable, net ....................................... $119,364 $ 102,982 ======== ========== 3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET The components of intangible assets, net are as follows (in thousands): JUNE 30, 2003 DECEMBER 31, 2002 --------------- ------------------- Goodwill ....................................................... $155,942 $ 157,035 Intangibles: Client lists ................................................. 11,876 9,217 Other intangibles ............................................ 565 484 -------- ---------- Total intangibles ....................................... 12,441 9,701 Total goodwill and other intangibles assets .................... 168,383 166,736 Less accumulated amortization .................................. (3,750) (3,030) -------- ---------- Total goodwill and other intangible assets, net ................ $164,633 $ 163,706 ======== ========== Client lists are amortized over a period not to exceed ten years. Other intangibles, which consist primarily of non-compete agreements, expirations, trademarks and website costs are amortized over periods ranging from three to ten years. 4. BANK DEBT Bank debt balances were as follows (in thousands, except percentages): JUNE 30, 2003 DECEMBER 31, 2002 --------------- ------------------- Bank debt: Revolving credit facilities, effective rates of 3.31% to 5.58% $ - $ 17,500 ======== ========== Weighted average rates ....................................... 5.14% 5.80% ======== ========== 7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) The bank agreement contains financial covenants that require CBIZ to meet certain requirements with respect to (i) minimum tangible net worth; (ii) maximum leverage ratio; and (iii) a minimum fixed charge coverage ratio. Limitations are also placed on CBIZ's ability to acquire as well as to divest operations. As of June 30, 2003, CBIZ was in compliance with its covenants. In the ordinary course of business, CBIZ provides letters of credit to certain lessors in lieu of security deposits. Letters of credit under the credit facility were $2.1 million and $1.9 million as of June 30, 2003 and December 31, 2002, respectively. Management does not expect any material charges to result from these instruments because performance is not expected to be required. At June 30, 2003, based on the borrowing base calculation, CBIZ had approximately $60.0 million of available funds under its credit facility. Effective June 6, 2003, CBIZ completed an amendment to its credit facility with its lenders. The amendment was completed for purposes of increasing restricted payments to allow CBIZ to repurchase up to $52.5 million of capital stock through December 31, 2003, in addition to the current provision permitting the purchase of stock for up to 50% of trailing twelve months net income. In conjunction with the amendment to allow for increased repurchase of capital stock, the following changes were made to the credit facility: (i) the minimum tangible net worth requirement was revised to a minimum net worth test with a beginning base of $260 million, and (ii) the borrowing base tied to levels of accounts receivable and WIP was revised to permit an over-advance of $5 million to the total borrowing base for up to 10 consecutive business days during each month through December 31, 2003. 5. CONTINGENCIES CBIZ is from time to time subject to claims and suits arising in the ordinary course of business. CBIZ is involved in certain legal proceedings as described in Part I, "Item 3 - Legal Proceedings" in our Annual Report on Form 10-K for the year ended December 31, 2002. There have been no significant developments in such claims or suits during the first six months of 2003, other than an adjustment recorded to certain legal reserves as the result of a favorable judgment received in April of 2003. Reserve adjustments are recorded in other income (expense), net. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the financial condition, results of operations or cash flows of CBIZ. 6. CONSOLIDATION AND INTEGRATION CHARGES The 1999 Plan -- During the fourth quarter of 1999, CBIZ's Board of Directors approved a plan to consolidate several operations in multi-office markets and integrate certain back-office functions into a shared-services center. The plan included the consolidation of approximately 60 locations, the elimination of more than 200 positions, and the divestiture of four non-core businesses. Other Plans -- Since adoption of the 1999 Plan, management has continued to evaluate market areas in order to meet its strategy to deliver services to clients conveniently, and to promote cross-serving between various service groups. CBIZ has initiated consolidation activities in several markets and has incurred expenses related to noncancellable lease obligations, severance obligations, and expense-reduction initiatives. During the first six months of 2002, CBIZ initiated plans for the consolidation of the Kansas City market which resulted in $1.7 million of charges related to noncancellable lease obligations. During the first six months of 2003, there were no significant charges related to consolidation and integration activity. Management continually evaluates and adjusts certain reserve estimates for noncancellable lease obligations based on changes in market conditions and sublease arrangements. 8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) Consolidation and integration reserve balances as of December 31, 2002, and activity during the six-month period ended June 30, 2003 was as follows (in thousands): LEASE CONSOLIDATIONS ------------------------------- 1999 PLAN OTHER PLANS ---------- ------------ Reserve balance at December 31, 2002 ........................... $ 64 $ 3,705 Reserve estimate adjustments to expense ...................... 20 154 Payments ..................................................... (78) (465) -------- ---------- Reserve balance at June 30, 2003 ............................... $ 6 $ 3,394 ======== ========== Consolidation and integration charges incurred for the three and six months ended June 30, 2003 and 2002, which are included in operating expenses in the consolidated statements of operations, were as follows (in thousands): ------------------------------- THREE MONTHS ENDED JUNE 30, ------------------------------- 2003 2002 -------- ---------- CONSOLIDATION AND INTEGRATION CHARGES NOT IN 1999 PLAN: Severance expense .......................................... $ 40 $ (12) Lease consolidation and abandonment ........................ 282 417 Other consolidation charges ................................ (19) 277 -------- ---------- Subtotal ............................................... 303 682 CONSOLIDATION AND INTEGRATION CHARGES FOR THE 1999 PLAN: Adjustment to lease accrual .................................... 20 91 -------- ---------- Total consolidation and integration charges .................... $ 323 $ 773 ======== ========== ------------------------------- SIX MONTHS ENDED JUNE 30, ------------------------------- 2003 2002 -------- ---------- CONSOLIDATION AND INTEGRATION CHARGES NOT IN 1999 PLAN: Severance expense .......................................... $ 94 $ 29 Lease consolidation and abandonment ........................ 586 2,427 Other consolidation charges ................................ (26) 333 -------- ---------- Subtotal ............................................... 654 2,789 CONSOLIDATION AND INTEGRATION CHARGES FOR THE 1999 PLAN: Adjustment to lease accrual .................................... 20 80 -------- ---------- Total consolidation and integration charges .................... $ 674 $ 2,869 ======== ========== 7. STOCK-BASED COMPENSATION CBIZ accounts for the stock-based compensation plans under the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost has been reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings (loss) per share as if CBIZ had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data). 9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ----------------------- ---------------------------- 2003 2002 2003 2002 ---------- ------ ---------- ---------- Net income (loss) as reported ............. $ 3,247 $1,136 $ 13,248 $ (69,571) Fair value of stock-based compensation, net of tax .................................... 816 905 1,618 1,707 ---------- ------ ---------- ---------- Pro forma net income (loss) ............... $ 2,431 $ 231 $ 11,630 $ (71,278) ========== ====== ========== ========== Earnings (loss) per share: Basic - as reported ................... $ 0.03 $ 0.01 $ 0.14 $ (0.73) Basic - pro forma ..................... $ 0.02 $ - $ 0.12 $ (0.75) Diluted - as reported ................. $ 0.03 $ 0.01 $ 0.14 $ (0.72) Diluted - pro forma ................... $ 0.02 $ - $ 0.12 $ (0.73) The above results may not be representative of the effects on net income for future years. 8. EARNINGS PER SHARE CBIZ presents both basic and diluted earnings per share. The following data shows the amounts used in computing earnings per share and the effect on the weighted average number of dilutive potential common shares (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2003 2002 2003 2002 -------- -------- -------- -------- NUMERATOR: ---------- Net income (loss) ............ $ 3,247 $ 1,136 $ 13,248 $(69,571) DENOMINATOR: ------------ BASIC Weighted average common shares ............... 95,138 95,005 95,112 94,945 -------- -------- -------- -------- DILUTED Options ............... 2,040 2,590 1,961 2,404 -------- -------- -------- -------- Total 97,178 97,595 97,073 97,349 ======== ======== ======== ======== 9. ACQUISITIONS In January 2003, CBIZ completed the acquisition of a benefits and insurance firm in Boca Raton, Florida, and in May 2003, CBIZ completed the acquisition of an Accounting Tax & Advisory firm in Orange County, California. The aggregate purchase price of these acquisitions was approximately $4.3 million, comprised of $1.4 million in cash and 177,000 shares of restricted common stock (estimated stock value of $0.5 million at acquisition) paid at closing, and up to an additional $2.4 million payable in cash which is contingent on the unit meeting certain future revenue targets. The excess of purchase price over fair value of net assets acquired was allocated to the purchased client list, which is being amortized over a 10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) ten-year period, and to certain non-compete agreements, which are being amortized over two years. The operating results of these firms have been included in the accompanying consolidated financial statements since the dates of acquisition. 10. DIVESTITURES During the first quarter of 2003, there were no transactions related to the sale of a business, commitment to sell a business, or classification of a unit as a discontinued operation. During the second quarter of 2003, CBIZ sold two businesses; Health Administrative Services (HAS) with offices in Dallas and Houston, Texas, and a small 401(k) recordkeeping business in Denver, Colorado. CBIZ completed the sale of these two businesses for an aggregate price of $4.2 million in cash. These divestitures resulted in a pretax gain of $1.8 million During the first quarter of 2002, CBIZ sold, closed or committed to sale, eight businesses. Of these eight operations, CBIZ completed the sale or closing of five Accounting, Tax and Advisory (ATA) operations, one Benefits and Insurance operation, and two National Practices operations for an aggregate price of $5.7 million which included $3.6 million in notes receivable. These divestitures resulted in a pretax gain of $1.1 million. During the second quarter of 2002, CBIZ completed the sale of one non-core business operation for an aggregate price of $1.2 million, which resulted in a pretax gain of $0.1 million. The sale of these businesses was either initiated before CBIZ adopted SFAS No. 144 "Accounting for the Impairment of or the Disposal of Long-Lived Assets", or did not meet the criteria for treatment as a discontinued operation and were reported under gain on divested operations from continuing operations. 11. SEGMENT REPORTING CBIZ business units are aggregated into three operating practice groups: Accounting, Tax and Advisory (ATA), Benefits and Insurance, and National Practices. CBIZ MMP, which is CBIZ's medical practice management unit within the National Practices Group, exceeded the quantitative threshold of aggregation (10% of total revenues) as defined under SFAS No. 131, "Disclosures About Segments of Enterprise and Related Information," in 2002, therefore requiring separate segment disclosure. In addition, certain technology operations were transferred from the ATA division to the National Practices division effective January 1, 2003. Historical financial data was not available for all of these operations; therefore, prior period data is included in the ATA results and was not reclassified between ATA and National Practices. In addition to the four reportable segments disclosed, corporate and other is also reported separately. Corporate and other includes certain operating expenses that are not allocated to any individual unit or segment, such as insurance costs, audit fees, consolidation and integration charges, and costs related to other company-wide initiatives. Segment information for the three and six-month periods ended June 30, 2003 and 2002 were as follows (in thousands): 11
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) THREE MONTHS ENDED JUNE 30, 2003 ------------------------------------------------------------------------------------- NATIONAL PRACTICE GROUP ---------------------- ACCOUNTING MEDICAL NATIONAL TAX & BENEFITS & PRACTICE PRACTICE CORPORATE ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL ------------------------------------------------------------------------------------- Revenue ........................... $50,992 38,490 18,670 17,928 - $126,080 Operating expenses ................ 46,459 30,722 15,229 18,542 1,537 112,489 ------------------------------------------------------------------------------------- Gross margin .................... 4,533 7,768 3,441 (614) (1,537) 13,591 Corporate general & administrative - - - - 4,772 4,772 Depreciation and amortization ..... 1,252 730 646 290 1,432 4,350 ------------------------------------------------------------------------------------- Operating income (loss) ......... 3,281 7,038 2,795 (904) (7,741) 4,469 Other income (expense): Interest expense ................ (14) (21) - - (262) (297) Gain on sale of operation, net .. - - - - 1,784 1,784 Other income (expense), net ..... 44 33 (90) 179 (321) (155) ------------------------------------------------------------------------------------- Total other income (expense) .. 30 12 (90) 179 1,201 1,332 ------------------------------------------------------------------------------------- Income (loss) from continuing ..... operations before income taxes $ 3,311 7,050 2,705 (725) (6,540) $ 5,801 ===================================================================================== THREE MONTHS ENDED JUNE 30, 2002 ------------------------------------------------------------------------------------- NATIONAL PRACTICE GROUP ----------------------- ACCOUNTING MEDICAL NATIONAL TAX & BENEFITS & PRACTICE PRACTICE CORPORATE ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL ------------------------------------------------------------------------------------- Revenue ........................... $52,065 38,110 16,634 18,354 - $125,163 Operating expenses ................ 46,702 31,050 13,233 19,209 1,934 112,128 ------------------------------------------------------------------------------------- Gross margin .................... 5,363 7,060 3,401 (855) (1,934) 13,035 Corporate general & administrative - - - - 5,159 5,159 Depreciation and amortization ..... 1,311 944 463 377 1,912 5,007 ------------------------------------------------------------------------------------- Operating income (loss) ......... 4,052 6,116 2,938 (1,232) (9,005) 2,869 Other income (expense): Interest expense ................ (13) (20) (2) (8) (610) (653) Gain on divested operations, net . - - - - 86 86 Other income (expense), net ..... 81 21 (10) 200 812 1,104 ------------------------------------------------------------------------------------- Total other income (expense) .. 68 1 (12) 192 288 537 ------------------------------------------------------------------------------------- Income (loss) from continuing ..... operations before income taxes $ 4,120 6,117 2,926 (1,040) (8,717) $ 3,406 ===================================================================================== 12
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) SIX MONTHS ENDED JUNE 30, 2003 ------------------------------------------------------------------------------------- NATIONAL PRACTICE GROUP ----------------------- ACCOUNTING MEDICAL NATIONAL TAX & BENEFITS & PRACTICE PRACTICE CORPORATE ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL ------------------------------------------------------------------------------------- Revenue ........................... $121,392 78,371 36,248 36,364 - $272,375 Operating expenses ................ 95,536 62,805 30,384 37,807 4,018 230,550 ------------------------------------------------------------------------------------- Gross margin .................... 25,856 15,566 5,864 (1,443) (4,018) 41,825 Corporate general & administrative - - - - 10,021 10,021 Depreciation and amortization ..... 2,508 1,484 1,247 613 2,795 8,647 ------------------------------------------------------------------------------------- Operating income (loss) ......... 23,348 14,082 4,617 (2,056) (16,834) 23,157 Other income (expense): Interest expense ................ (27) (44) (1) (1) (547) (620) Gain on sale of operations, net . - - - - 1,784 1,784 Other income (expense), net ..... 122 85 (91) 401 (1,210) (693) ------------------------------------------------------------------------------------- Total other income (expense) .. 95 41 (92) 400 27 471 ------------------------------------------------------------------------------------- Income (loss) from continuing ..... operations before income taxes $ 23,443 14,123 4,525 (1,656) (16,807) $ 23,628 ===================================================================================== SIX MONTHS ENDED JUNE 30, 2002 ------------------------------------------------------------------------------------- NATIONAL PRACTICE GROUP ----------------------- ACCOUNTING MEDICAL NATIONAL TAX & BENEFITS & PRACTICE PRACTICE CORPORATE ADVISORY INSURANCE MGMT. - OTHER AND OTHER TOTAL ------------------------------------------------------------------------------------- Revenue ........................... $124,410 73,969 31,745 37,243 - $267,367 Operating expenses ................ 97,241 61,196 26,184 37,642 5,259 227,522 ------------------------------------------------------------------------------------- Gross margin .................... 27,169 12,773 5,561 (399) (5,259) 39,845 Corporate general & administrative - - - - 10,029 10,029 Depreciation and amortization ..... 2,373 1,915 899 757 3,994 9,938 ------------------------------------------------------------------------------------- Operating income (loss) ......... 24,796 10,858 4,662 (1,156) (19,282) 19,878 Other income (expense): Interest expense ................ (27) (42) (4) (30) (1,368) (1,471) Gain on divested operations, net. - - - - 1,110 1,110 Other income (expense), net ....... 158 118 (7) 445 892 1,606 ------------------------------------------------------------------------------------- Total other income (expense) .. 131 76 (11) 415 634 1,245 ------------------------------------------------------------------------------------- Income (loss) from continuing ..... operations before income taxes $ 24,927 10,934 4,651 (741) (18,648) $21,123 ===================================================================================== 12. DISCONTINUED OPERATIONS During 2002, CBIZ adopted formal business plans to sell or close five business operations that were no longer part of CBIZ's strategic long-term growth objectives. These business operations are reported as discontinued operations and the net assets and liabilities and results of operations are reported separately in the consolidated financial statements. One operation was closed during the first quarter of 2002 for a loss on disposal of $0.3 million and three additional operations were subsequently closed during the remainder of the year 2002. One operation still remains available for sale as of June 30, 2003. 13
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) Revenue from the discontinued operations for the three and six-months ended June 30, 2003 were $0.6 million and $2.7 million, respectively, compared to $1.3 million and $5.5 million for the comparable periods in 2002. The assets and liabilities of the business units classified as discontinued operations consisted of the following (in thousands): JUNE 30, 2003 DECEMBER 31, 2002 ------------- ----------------- Accounts receivable, net .................. $ 5,539 $ 5,499 Property and equipment, net ............... 488 508 Deferred tax asset, net ................... 3,194 3,554 Other assets .............................. 833 5 --------- --------- Assets of discontinued operations ...... $ 10,054 $ 9,566 ========= ========= Accounts payable .......................... $ 178 $ 425 Accrued expenses .......................... 6,778 6,480 --------- --------- Liabilities of discontinued operations . $ 6,956 $ 6,905 ========= ========= 13. SUBSEQUENT EVENTS In July of 2003, CBIZ completed the acquisition of a benefits and insurance firm located in Salt Lake City, as well as a benefits and insurance book of business in Hunt Valley, Maryland. The aggregate purchase price of these acquisitions was approximately $2.0 million in cash, of which $0.8 million was paid at closing, and $1.2 million of which is contingent on the unit meeting certain future revenue targets. In July of 2003, CBIZ completed its modified Dutch Auction tender offer which resulted in the purchase of approximately 9.9 million shares of common stock at a purchase price of $3.30 per share, or a total cost of approximately $32.8 million. Subject to applicable law, CBIZ may in the future purchase up to 5.1 million additional shares under its previously announced share repurchase program authorizing the repurchase of up to 15 million shares by December 31, 2003. The funds necessary to complete this purchase were primarily drawn from CBIZ's bank line of credit, leaving approximately $30.0 million available under the credit facility. On August 6, 2003, CBIZ announced the appointment of two new independent directors, effective September 1, 2003. The appointments of Todd J. Slotkin, 50, and Donald V. Wier, 62, bring the total number of directors on CBIZ's Board to eight, seven of whom are outside directors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in the understanding of CBIZ's financial position and results of operations for the three and six months ended June 30, 2003 and 2002. OPERATING PRACTICE GROUPS CBIZ currently delivers products and services through three practice groups. A brief description of these groups' operating results and factors affecting their businesses is provided below. Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory (ATA) group contributed approximately $51.0 million and $52.1 million of revenue, or approximately 40.4% and 41.6% of CBIZ's total revenue for the quarters ended June 30, 2003 and 2002, respectively. The decrease in revenue attributable to divestitures completed during or subsequent to the first quarter 2002 was $1.9 million, offset by an increase in revenues of $0.3 million due to acquisitions. For ATA businesses with a full period of operations for the three months ended June 30, 2003 and 2002, revenue increased $0.5 million, or 1.1%. The ATA group reported gross margins of 8.9% and 10.3% for the three months ended June 30, 2003 and 2002. Benefits and Insurance Services. The Benefits and Insurance group contributed approximately $38.5 million and $38.1 million of revenue, or approximately 30.5% and 30.4% of CBIZ's total revenue for the quarter ended June 30, 2003 and 2002, respectively. Revenue growth of $2.0 million related to acquisitions completed subsequent to the first quarter of 2002, offset by revenue decline from divestitures of $0.9 million. For Benefits and Insurance businesses with a full period of operations for the three-months ended June 30, 2003 and 2002, same-unit revenue decreased $0.7 million, or 2.0%. Same unit revenue decline was attributable to (i) the timing of commission bonus payments planned for the second quarter that were received during the first quarter; and (ii) decrease in revenue from worksite marketing which is expected to be recognized during the second half of the year. Gross margin for the Benefits and Insurance group for the three months ended June 30, 2003 was 20.2% as compared to 18.5% for the three-months ended June 30, 2002. National Practices Services- Medical Management Practice. CBIZ Medical Management Professionals (CBIZ MMP), CBIZ's medical practice management unit in the National Practices operating group, contributed approximately $18.7 million and $16.6 million, or 14.8% and 13.3%, of CBIZ's total revenue for the quarter ended June 30, 2003 and 2002, respectively. CBIZ MMP's revenue growth of $2.0 million, or 12.2%, is primarily attributable to the addition of new clients and the expansion into new markets, such as entrance into the western region of the United States during the later part of 2002. The gross margin for the three months ended June 30, 2003 was 18.4% as compared to 20.4% for the three months ended June 30, 2002. National Practices Services- Other. The other units within the National Practices group, excluding CBIZ MMP, contributed approximately $17.9 million and $18.5 million of revenue, or approximately 14.2% and 14.8% of CBIZ's total revenue for the quarter ended June 30, 2003 and 2002, respectively. The decrease in revenue was primarily experienced in CBIZ's mergers and acquisitions and valuation businesses. RESULTS OF OPERATIONS - CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002 Revenue Total revenue for the three months ended June 30, 2003 was $126.1 million as compared to $125.2 million for the three months ended June 30, 2002, representing an increase of $0.9 million, or 0.7%. The increase in revenue attributable to acquisitions completed subsequent to March 31, 2002 was $2.3 million, and was offset by a decrease in revenue of $1.2 million due to divestitures completed subsequent to March 31, 2002. For business units with a full period of operations for the three months ended June 30, 2003 and 2002, revenue decreased $0.2 million or 0.2%. A more comprehensive analysis of revenue by each operating practice group is discussed above. 15
Expenses Operating expenses increased to $112.5 million for the three-month period ended June 30, 2003, from $112.1 million for the comparable period in 2002, an increase of $0.4 million, or 0.3%. As a percentage of revenue, operating expenses for the three-month period ended June 30, 2003 were 89.2%, compared to 89.6% for the comparable period in 2002. The primary components of operating expenses are personnel costs and occupancy expense. Operating expenses included consolidation, integration and severance charges for the three months ended June 30, 2003 and 2002 of $0.6 million and $1.2 million, respectively. Excluding consolidation and integration charges, operating expenses were $111.9 million or 88.8% as a percentage of revenue, for the three-month period ended June 30, 2003, compared to $111.0 million, or 88.6% as a percentage of revenue, for the comparable period in 2002. CBIZ believes this information may provide additional meaningful information in evaluating the company's performance. There were no significant changes in the components of operating expenses between the second quarters of 2002 and 2003. Corporate general and administrative expenses decreased to $4.8 million for the three-month period ended June 30, 2003, from $5.2 million for the comparable period in 2002. Corporate general and administrative expenses represented 3.8% of total revenues for the three-month period ended June 30, 2003, down from 4.1% for the comparable period in 2002. The decrease in corporate general and administrative costs was primarily due to a decrease in legal costs, as the level of legal expenses to pursue cases concerning non-competition violations by former employees and other cases in which CBIZ is involved, was higher than usual in 2002. Depreciation and amortization expense decreased to $4.4 million for the three-month period ended June 30, 2003, from $5.0 million for the comparable period in 2002, a decrease of $0.6 million, or 13.1%. The decrease is attributable to asset retirements, fully depreciated assets, and the shift from purchasing computer-related items to leasing such items. These operating lease costs are recorded as operating expenses, rather than capitalized and recorded as depreciation. As a percentage of total revenues, depreciation and amortization expense was 3.5% for the three-month period ended June 30, 2003, compared to 4.0% for the comparable period in 2002. Interest expense decreased to $0.3 million for the three-month period ended June 30, 2003, from $0.7 million for the comparable period in 2002, a decrease of $0.4 million, or 54.5%. The decrease is the result of a lower average outstanding debt of $10.7 million during the second quarter of 2003, compared to $47.1 million during the second quarter of 2002, and average interest rates were approximately 5.2% during the second quarters of 2003, and 2002. Gain on divested operations, net was $1.7 million for the three months ended June 30, 2003, and was related to the sale of two businesses operations, Health Administrative Services (HAS) and a small 401(k) recordkeeping business. Gain on divested operations, net was $0.1 million for the three months ended June 30, 2002, and was related to the sale of one business operation. See Note 10 to CBIZ's consolidated financial statements included herewith. CBIZ reported other expense of $0.2 million for the three-month period ended June 30, 2003, compared to other income of $1.1 million for the comparable period in 2002, a decrease of $1.3 million. Other income (expense), net is comprised primarily of interest income earned on funds held for clients at CBIZ's payroll business, gain and losses on sale of assets, charges for legal reserves and settlements and miscellaneous income such as contingent royalties from previous divestitures. The change is primarily related to a $0.4 million impairment charge to notes receivable and $0.4 million of other income relating to contingent royalties received in 2002 that did not reoccur in 2003. CBIZ recorded income taxes from continuing operations of $2.5 million and $1.5 million for the three-month periods ended June 30, 2003 and 2002, respectively. The effective tax rate decreased to 42.5% for the three-month period ended June 30, 2003, from 42.6% for the comparable period in 2002. The effective tax rate for the three-months ended June 30, 2003 and 2002 are generally in line with the statutory federal and state tax rates. FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 Revenue Total revenue for the six months ended June 30, 2003 was $272.4 million as compared to $267.4 million for the six months ended June 30, 2002, representing an increase of $5.0 million, or 1.9%. The increase in revenue attributable to acquisitions completed subsequent to March 31, 2002 was $4.5 million, and was offset by a decrease in revenue of $2.0 million due to divestitures completed subsequent to March 31, 2002. For business 16
units with a full period of operations for the six months ended June 30, 2003 and 2002, revenue increased $2.5 million or 1.0%. Expenses Operating expenses increased to $230.6 million for the six-month period ended June 30, 2003, from $227.5 million for the comparable period in 2002, an increase of $3.1 million, or 1.3%. As a percentage of revenue, operating expenses for the six-month period ended June 30, 2003 were 84.6%, compared to 85.1% for the comparable period in 2002. The primary components of operating expenses are personnel costs and occupancy expense. Operating expenses were impacted by consolidation and integration charges of $1.1 million and $3.3 million for the six months ended June 30 2003 and 2002, respectively. Excluding consolidation and integration charges, operating expenses were $229.5 million, or 84.2% as a percentage of revenue, for the six-month period ended June 30, 2003, compared to $224.2 million, or 83.9% as a percentage of revenue, for the comparable period in 2002. CBIZ believes that this information may provide additional meaningful information in evaluating the Company's performance. Operating expenses increased primarily due to increased compensation expense of $7.1 million related to (i) additional hires to CBIZ's medical practice management unit to support its growth, (ii) higher commission expense in the Benefits and Insurance practice group related to the increased revenue and, (iii) the addition of several former Arthur Andersen, LLP professionals to the ATA practice group offset in part by other staff reductions in the group. The increase was also offset by a decrease in bad debt expense of $1.5 million. Corporate general and administrative expenses were consistent at $10.0 million for the six-month periods ended June 30, 2003, and 2002. Corporate general and administrative expenses represented 3.7% of total revenues for the six-month period ended June 30, 2003, down from 3.8% for the comparable period in 2002. Changes in corporate general and administrative costs were primarily driven by an increase in severance costs of approximately $0.7 million incurred related to reductions in corporate staff during the first quarter of 2003, offset by a decrease of $0.8 million in certain legal expenses, as the level of legal expenses to pursue non-competition violations by former employees was higher than usual in 2002. Depreciation and amortization expense decreased to $8.6 million for the six-month period ended June 30, 2003, from $9.9 million for the comparable period in 2002, a decrease of $1.3 million, or 13.0%. The decrease is attributable to asset retirements, fully depreciated assets, and the shift from purchasing computer-related items to leasing such items. These operating lease costs are recorded as operating expenses, rather than capitalized and recorded as depreciation. As a percentage of total revenues, depreciation and amortization expense was 3.2% for the six-month period ended June 30, 2003, compared to 3.7% for the comparable period in 2002. Interest expense decreased to $0.6 million for the six-month period ended June 30, 2003, from $1.5 million for the comparable period in 2002, a decrease of $0.9 million, or 57.9%. The decrease is the result of a lower average outstanding debt of $15.0 million during the first six months of 2003, compared to $50.5 million during the comparable period in 2002, and a lower average interest rate of 5.1% during the first six months of 2003, compared to 5.5% during the comparable period in 2002. Gain on divested operations, net was $1.8 million for the six-month period ended June 30, 2003, and was related to the sale or closing of two business operations. Gain on divested operations, net was $1.1 million for the six-month period ended June 30, 2002, and was related to the sale or closing of seven businesses operations. See Note 10 to CBIZ's consolidated financial statements included herewith. CBIZ reported other expense of $0.7 million for the three-month period ended June 30, 2003, compared to other income of $1.6 million for the comparable period in 2002, a decrease of $2.3 million. Other income (expense), net is comprised primarily of interest income earned on funds held for clients at CBIZ's payroll business, gains and losses on sale of assets, charges for legal reserves and settlements, and miscellaneous income such as contingent royalties from previous divestitures. The change is primarily related to $2.0 million of impairment charges to notes receivable and $0.4 million of other income relating to contingent royalties received in 2002 that did not reoccur in 2003. CBIZ recorded income taxes from continuing operations of $10.0 million for the six months ended June 30, 2003, compared to $9.1 million recorded for the six months ended June 30, 2002. The effective tax rate decreased to 42.5% for the six-month period ended June 30, 2003, from 43.1% for the comparable period in 2002. The effective tax rate for the six-months ended June 30, 2003 and 2002 are generally in line with the statutory federal and state tax rates. 17
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS During 2002, CBIZ adopted formal plans to divest five non-core operations which were no longer part of CBIZ's strategic long-term growth objectives. These operations were classified as discontinued operations in accordance with the adoption of Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and the assets, liabilities, and results of operations are reported separately in the consolidated financial statements. One of these operations was closed during the first quarter of 2002 and an additional three units were subsequently sold or closed as of December 31, 2002. One operation still remains available for sale as of June 30, 2003, and the sale is expected to be completed by year end. Based on the estimated cost of closure, CBIZ recorded a loss on disposal from discontinued operations, net of tax, of $0.2 million for the three and six months ended June 30, 2003. Revenue associated with these five discontinued operations for the three and six months ended June 30, 2003 was $0.6 million and $1.1 million, respectively, compared to $2.0 million and $5.5 million for the comparable periods in 2002, respectively. The income from operations, net of tax, associated with these divestitures three months ended June 30, 2003 and 2002 was $0.1 million and $0.1 million, respectively, compared to a loss from operations, net of tax, of $0.2 million and $0.4 million for the six months ended June 30, 2003 and 2002, respectively. RESULTS OF OPERATIONS -- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 2002, CBIZ adopted SFAS No. 142, "Goodwill and Other Intangible Assets", which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually at the reporting unit level. SFAS 142 also requires intangible assets with finite useful lives to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." CBIZ finalized the required transitional tests of goodwill during 2002, and recorded an impairment charge of $88.6 million on a pre-tax basis. This non-cash charge is reflected as a cumulative effect of a change in accounting principle, net of tax benefit, of $80.0 million. FINANCIAL CONDITION Cash provided by operating activities and funds available from CBIZ's credit facility provide the resources to support current operations, projected growth, acquisitions and capital expenditures. Restricted cash at June 30, 2003 was $12.5 million, a decrease of $4.5 million from December 31, 2002. Restricted cash represents those funds held in connection with CBIZ's NASD regulated operations and funds held in connection with the pass through of insurance premiums to the carrier. Funds held for clients were $32.9 million at June 30, 2003, a decrease of $16.3 million from December 31, 2002. Restricted cash and funds held for clients fluctuate during the year based on the timing of cash receipts and related payments. Accounts receivable, net were $119.4 million at June 30, 2003 versus $103.0 million at December 31, 2002, an increase of $16.4 million. The increase in receivables is primarily attributed to the seasonal increase in revenues, namely tax services generated by the ATA operating practice group. Notes receivable at June 30, 2003 decreased $2.0 million from December 31, 2002, primarily related to an impairment charge. Current liabilities before client fund obligations increased $7.1 million from December 31, 2002 primarily related to an increase in income taxes payable. Client fund obligations were $32.9 million, a decrease of $16.3 million from December 31, 2002. Client fund obligations fluctuate during the year based on the timing of cash receipts and related payments. CBIZ's bank debt balance was zero at June 30, 2003, a $17.5 million reduction from December 31, 2002. See Note 4 to CBIZ's consolidated financial statements included herewith for additional information regarding bank debt. LIQUIDITY AND CAPITAL RESOURCES CBIZ's bank line of credit is a $73.0 million revolving credit facility with Bank of America as the agent bank. The credit facility carries an option to increase the total commitment to $80 million and allows for the allocation of funds for strategic initiatives, including acquisitions and the repurchase of CBIZ common stock. CBIZ expects to use the facility for working capital, internal growth initiatives, and its acquisition program. The facility has a three-year term with an expiration date of September 2005. CBIZ is currently in compliance with all covenants under its credit facility. At June 30, 2003, CBIZ had completely paid down its credit facility, and had approximately $60.0 million of available funds under the facility based on the borrowing base calculation. Management believes that those 18
available funds, along with cash generated from operations, will be sufficient to meet its liquidity needs in the foreseeable future. See Notes 4 and 13 to CBIZ's consolidated financial statements included herewith for additional information regarding the credit facility. SOURCES AND USES OF CASH Net cash provided by operating activities was $21.1 million and $24.5 million for the six-months ended June 30, 2003 and 2002, respectively, and was the primary source of funds used to reduce CBIZ's bank debt. CBIZ's principal source of net operating cash is derived from the collection of fees from professional services rendered to its clients and commissions earned in the areas of accounting, tax, valuation and advisory services, benefits consulting and administration services, insurance, human resources and payroll solutions, capital advisory, retirement and wealth management services and technology solutions. Net cash used in investing activities during the six-months ended June 30, 2003 of $2.6 million primarily consisted of $5.2 million used for capital expenditures and $1.6 million used toward the acquisitions of two benefits and insurance firms, partially offset by the proceeds from the divestiture of two businesses of $3.8 million. Capital expenditures consisted of leasehold improvements and equipment in connection with the consolidation of certain offices, IT capital to support the growth of the medical practice management unit and equipment purchases in relation to normal replacement. During the six-months ended June 30, 2003, the majority of the capital expenditures were related to the build-out of the new Kansas City facility, which was completed in June. Net cash used in investing activities during the six-months ended June 30, 2002 of $2.0 million consisted of $6.3 million used for capital expenditures, offset by the proceeds from the divestiture of seven business units of $3.6 million and the collections of notes receivable of $0.7 million. Net cash used in financing activities was $18.4 million in 2003 compared to $21.9 million in 2002. Cash was primarily used to reduce bank debt by $17.5 million in 2003, compared to a reduction in bank debt of $22.0 million for the comparable period in 2002. INTEREST RATE RISK MANAGEMENT CBIZ entered into an interest rate swap agreement in the third quarter of 2001 to reduce the impact of potential rate increases on variable rate debt through its credit facility. Based on the company's continued strong cash flow and its ability to completely pay down its credit facility, the remaining notional amount of $10 million under the swap was unwound during the quarter ended June 30, 2003. As a result $0.2 million previously recorded as accumulated other comprehensive loss in stockholders' equity was charged to interest expense during the quarter ended June 30, 2003. CRITICAL ACCOUNTING POLICIES The policies discussed below are considered by management to be critical to the understanding of CBIZ's consolidated financial statements because their application places significant demand on management's judgment, and financial reporting results rely on estimation about the effects of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that estimates may require adjustment if future events develop differently than expected. REVENUE RECOGNITION AND VALUATION OF UNBILLED REVENUES Revenue is recognized only when all of the following are present: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) our fee to the client is fixed or determinable; and (iv) collectibility is reasonably assured, which is in accordance with generally accepted accounting principles and SEC Staff Accounting Bulletin No. 101. CBIZ offers a vast array of products and outsourced business services to its clients. Those services are delivered through three segments. A description of revenue recognition, as it relates to those segments, is provided below: ACCOUNTING, TAX AND ADVISORY SERVICES - Revenue consists primarily of fees for accounting services, preparation of tax returns and consulting services. Revenues are recorded in the period in which they are earned. CBIZ bills clients based upon a predetermined agreed upon fixed fee or actual hours incurred on client projects at expected net realizable rates per hour, plus any out-of-pocket expenses. The cumulative impact on any 19
subsequent revision in the estimated realizable value of unbilled fees for a particular client project is reflected in the period in which the change becomes known. BENEFITS & INSURANCE - Revenue consists primarily of brokerage and agency commissions, and fee income for administering health and retirement plans. A description of the revenue recognition, based on insurance products and billing arrangements, is described below: - Commissions relating to brokerage and agency activities whereby CBIZ has primary responsibility for the collection of premiums from insured's (agency or indirect billing) are generally recognized as of the earlier of the effective date of the insurance policy or the date billed to the customer. - Commissions to be received directly from insurance companies (direct billing) are generally recognized when the amounts are determined. - Life insurance commissions are generally recognized when the amounts are determined. - Commission revenue is reported net of sub-broker commissions. - Contingent commissions are recognized at the earlier of notification or cash collection. - Fee income is recognized in the period earned, and may be based on actual hours incurred on an hourly fee basis, fixed fee arrangements or asset-based fees. NATIONAL PRACTICES - The business units that comprise this division offer a variety of services. A description of revenue recognition associated with the primary services is provided below: - Mergers & Acquisitions and Capital Advisory - Revenue associated with non-refundable retainers are recognized on a pro rata basis over the life of the engagement. Revenue associated with success fee transactions are recognized when the transaction is completed. - Technology Consulting - Revenue associated with hardware and software sales is recognized upon delivery and acceptance of the product. Revenue associated with installation and service agreements are recognized as services are performed. Consulting revenue is recognized on an hourly or per diem fee basis. - Valuation and Property Tax - Revenue associated with retainer contracts are recognized on a pro rata basis over the life of the contract, which is generally twelve months. Revenue associated with contingency arrangements is recognized once written notification is received from an outside third party (e.g., the assessor in the case of a property tax engagement) acknowledging that the contingency has been completed). - Medical Practice Management - Revenue is recognized when payments are received on our clients' patient accounts. VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Specifically, management must make estimates of the collectibility of our accounts receivable, including unbilled accounts receivable, related to current period service revenue. Management analyzes historical bad debts, client credit-worthiness, and current economic trends and conditions when evaluating the adequacy of the allowance for doubtful accounts and the collectibility of notes receivable. Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result if management made different judgments or utilized different estimates. VALUATION OF GOODWILL Effective January 1, 2002, CBIZ adopted the provisions of SFAS 142 and accordingly ceased amortization of our remaining goodwill balance. During 2002, CBIZ completed the process of evaluating our goodwill for impairment 20
using the new fair market impairment guidelines of SFAS 142. This change to a new method of accounting for goodwill resulted in a non-cash impairment charge of $88.6 million on a pretax basis ($80.0 million net of tax), which was recorded as a cumulative effect of a change in accounting principle. VALUATION OF INVESTMENTS CBIZ has certain investments in privately held companies that are currently in their start-up or development stages and are included in "other assets" in the accompanying unaudited consolidated balance sheets. These investments are inherently risky as the market for the technologies or products these companies have under development are typically in the early stages. The value of these investments is influenced by many factors, including the operating effectiveness of these companies, the overall health of the companies' industries, the strength of the private equity markets and general market conditions. Although the market value of these investments is not readily determinable, management believes their current fair values approximate their carrying values as of June 30, 2003. In light of the circumstances noted above, particularly with respect to the current economic environment, it is possible that the fair value of these investments could decline in future periods, and further impairment could occur. LOSS CONTINGENCIES Loss contingencies, including litigation claims, are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis that often depends on judgment regarding potential actions by third parties. ESTIMATES OF INCENTIVE COMPENSATION COSTS AND EFFECTIVE INCOME TAX RATES Incentive compensation costs and income tax expense are two significant expense categories that are highly dependent upon management estimates and judgments, particularly at each interim reporting date. In arriving at the amount of expense to recognize, management believes it makes reasonable estimates and judgments using all significant information available. Incentive compensation costs are accrued on a monthly basis; however, the ultimate determination is made after our year-end results are finalized; thus, estimates are subject to change. Circumstances that could cause our estimates of effective income tax rates to change include the impact of information that subsequently becomes available as we prepared our corporate income tax returns; the level of actual full-year pre-tax income; revisions to tax positions taken as a result of further analysis and consultation; and changes mandated as a result of audits by taxing authorities. OTHER SIGNIFICANT POLICIES Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above are nevertheless important to understanding the consolidated financial statements. Those policies are described in Note 1 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2002. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, FASB issued Interpretation 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 addresses the consolidation of variable interest entities (VIEs) that have the characteristics of equity investments at risk not sufficient to permit the entity to finance its activities without additional financial support from other parties, or VIEs in which the equity investor lacks essential characteristics of a controlling financial interest. The consolidation requirements of FIN 46 apply immediately to VIE's created after January 31, 2003. The consolidation requirements apply to entities existing prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003 regardless of when the VIE was established. CBIZ has adopted the disclosure provisions and the consolidation requirements, where applicable, on July 1, 2003. CBIZ has evaluated the impact of FIN 46 and does not believe that the consolidation provisions of FIN 46 will have a material impact on the consolidated financial statements. In January 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement will improve financial reporting by requiring that contracts with comparable 21
characteristics be accounted for similarly, and will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This Statement is effective for contracts entered into or modified after June 30, 2003. CBIZ does not believe this Statement will have a material impact on is financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement affects the accounting for three types of freestanding financial instruments that could previously be accounted for as equity: mandatorily redeemable shares; put options and forward purchase contracts; and obligations that can be settled with shares. This Statement is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective July 1, 2003. CBIZ does not believe this Statement will have a material impact on is financial position, results of operations, or cash flows. FORWARD-LOOKING STATEMENTS This 10-Q Report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this 10-Q Report, including without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding CBIZ's financial position, business strategy and plans and objectives for future performance are forward-looking statements. Forward-looking statements are commonly identified by the use of such terms and phrases as "intends," "believes," "estimates," "expects," "projects," "anticipates," "foreseeable future," "seeks," and words or phases of similar import. Such statements are subject to certain risks, uncertainties or assumptions. Should one or more of these risks or assumptions materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Such risks and uncertainties include, but are not limited to, CBIZ's ability to adequately manage its growth; CBIZ's dependence on the services of its CEO and other key employees; competitive pricing pressures; general business and economic conditions; and changes in governmental regulation and tax laws affecting its operations. Consequently, no forward-looking statement can be guaranteed. A more detailed description of risks and uncertainties may be found in CBIZ's Annual Report on Form 10-K. CBIZ undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK Quantitative Information About Market Risk. CBIZ's floating rate debt under its credit facility exposes the Company to interest rate risk. A change in the Federal Funds Rate, or the Reference Rate set by the Bank of America (San Francisco), would affect the rate at which CBIZ could borrow funds under its credit facility. CBIZ had entered into an interest rate swap during 2001 to minimize the potential impact of future increases in interest rates. This interest rate swap was terminated during the second quarter of 2003, in concert with the reduction in debt. See Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Risk Management," for a further discussion of this financial instrument. CBIZ does not engage in trading market risk sensitive instruments. Except for the interest rate swap discussed above, CBIZ does not purchase instruments, hedges, or "other than trading" instruments that are likely to expose CBIZ to market risk, whether foreign currency exchange, commodity price or equity price risk. CBIZ has not issued debt instruments, entered into forward or futures contracts or purchased options. Qualitative Information About Market Risk. CBIZ's primary market risk exposure is that of interest rate risk. A change in the Federal Funds Rate, or the reference rate set by the Bank of America (San Francisco), would affect the rate at which CBIZ could borrow funds under its credit facility. See "Quantitative Information about Market Risk" for a further discussion on the potential impact of a change in interest rates. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer have evaluated the disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as of the end of the period covered by this quarterly report. Based on this evaluation they concluded that the disclosure controls and procedures effectively ensure that information required to be disclosed in our filings and submissions under the Exchange Act is 22
recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING There have been no significant changes in our internal controls over financial reporting that have materially affected, or is reasonably likely to affect the internal control over financial reporting, during the quarter covered by this report PART II - OTHER INFORMATION --------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At CBIZ's Annual Meeting of Shareholders held on May 16, 2003, the following matters were submitted to a vote of stockholders: 1) The election of the following individuals to the Board of Directors to serve until the 2006 Annual Meeting of Shareholders. Authority Granted Authority Withheld ----------------- ------------------ Gary W. DeGroote 66,326,202 1,425,448 Harve A. Ferrill 65,442,135 2,309,515 2) The approval of the appointment of KPMG LLP as independent accountants for fiscal year 2003. Shares For Shares Against Abstained ---------- -------------- --------- 66,160,827 1,558,175 32,648 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed during the three months ended June 30, 2003: On April 29, 2003, CBIZ filed a current report on Form 8-K to provide investors with its first quarter earnings, as released to the public and discussed on a conference call on April 29, 2003. On June 10, 2003, CBIZ filed a current report on Form 8-K to provide investors with information concerning CBIZ and its operations in a series of presentations that began June 11, 2003. 23
SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Century Business Services, Inc. ------------------------------- (Registrant) Date: August 14, 2003 By: /s/ WARE H. GROVE ------------------- -------------------------- Ware H. Grove Chief Financial Officer - 24
Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CENTURY BUSINESS SERVICES, INC. I, Steven L. Gerard, Chief Executive Officer, certify that: 1. I have reviewed this report on Form 10-Q of Century Business Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 By: /s/ Steven L. Gerard --------------- ----------------------------------- Steven L. Gerard Chief Executive Officer
Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CENTURY BUSINESS SERVICES, INC. I, Ware H. Grove, Chief Financial Officer, certify that: 1. I have reviewed this report on Form 10-Q of Century Business Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 By: /s/ Ware H. Grove --------------- -------------------------- Ware H. Grove Chief Financial Officer
Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CENTURY BUSINESS SERVICES, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended June 30, 2003 of Century Business Services, Inc. (the "Issuer"). I, Steven L. Gerard, the Chief Executive Officer of the Issuer, certify that to the best of my knowledge: (i) the Form 10-Q for the quarterly period ended June 30, 2003 fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Form 10-Q for the quarterly period ended June 30, 2003 fairly presents, in all material respects, the financial condition and results of operations of the Issuer. A SIGNED ORIGINAL OF THE WRITTEN STATEMENT REQUIRED BY SECTION 906 OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE ISSUER AND WILL BE RETAINED BY THE ISSUER AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. Dated: August 14, 2003. /s/ Steven L. Gerard ----------------------------------------- Steven L. Gerard, CEO Subscribed and sworn to before me this 14th day of August, 2003. /s/ Michael W. Gleespen - -------------------------------------------- Name: Michael W. Gleespen Title: Notary Public & Attorney-At-Law Registered in Franklin County, Ohio No Expiration Date
Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CENTURY BUSINESS SERVICES, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended June 30, 2003 of Century Business Services, Inc. (the "Issuer"). I, Ware H. Grove, the Chief Financial Officer of the Issuer, certify that to the best of my knowledge: (i) the Form 10-Q for the quarterly period ended June 30, 2003 fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Form 10-Q for the quarterly period ended June 30, 2003 fairly presents, in all material respects, the financial condition and results of operations of the Issuer. A SIGNED ORIGINAL OF THE WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE ISSUER AND WILL BE RETAINED BY THE ISSUER AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. Dated: August 14, 2003 /s/ Ware H. Grove ----------------------------------- Ware H. Grove, CFO Subscribed and sworn to before me this 14th day of August, 2003. /s/ Michael W. Gleespen - -------------------------------------------- Name: Michael W. Gleespen Title: Notary Public & Attorney-At-Law Registered in Franklin County, Ohio No Expiration Date