<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to
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Commission file number 0-25890
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CENTURY BUSINESS SERVICES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2769024
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6480 Rockside Woods Boulevard South, Suite 330, Cleveland, Ohio 44131
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
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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 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, 2000
--------------------- -------------
Par value $.01 per share 95,479,629
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Exhibit Index is on page 15 of this report.
1
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 5
Notes to the Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
Item 3. Quantitative and Qualitative Information about Market Risk 12
PART II OTHER INFORMATION :
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
Exhibit Index 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------------- ---------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 33,538 $ 48,906
Restricted cash 15,800 17,246
Accounts receivable, less allowance for doubtful
accounts of $14,303 and $13,272 205,599 188,359
Notes receivable - current 2,810 3,209
Income taxes recoverable 3,568 14,835
Deferred tax asset 9,912 9,912
Other current assets 12,415 13,001
Net assets of discontinued operations 29,097 36,813
--------------------- ---------------------
Total current assets 312,739 332,281
Goodwill, net of accumulated amortization of
$32,506 and $18,527 371,067 379,922
Fixed assets, net of accumulated depreciation of
$26,872 and $21,792 65,365 56,148
Notes receivable - non-current 6,043 4,856
Other assets 17,453 14,136
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TOTAL ASSETS $ 772,667 $ 787,343
===================== =====================
LIABILITIES
Accounts payable $ 42,101 $ 41,228
Bank debt 149,100 -
Notes payable and capitalized leases - current 5,639 6,534
Accrued expenses 31,332 50,833
--------------------- ---------------------
Total current liabilities 228,172 98,595
Bank debt - 144,000
Notes payable and capitalized leases - long term 3,095 1,345
Deferred tax liability 11,968 11,968
Accrued expenses 16,146 18,303
--------------------- ---------------------
TOTAL LIABILITIES 259,381 274,211
--------------------- ---------------------
STOCKHOLDERS' EQUITY
Common stock 933 933
Additional paid-in capital 438,918 443,052
Retained earnings 75,842 74,170
Unearned ESOP (1,795) (1,795)
Treasury stock (754) (754)
Accumulated other comprehensive income (loss) 142 (2,474)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 513,286 513,132
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 772,667 $ 787,343
===================== =====================
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
3
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 148,264 132,252 $ 320,384 270,624
Expenses:
Operating 125,747 101,416 255,165 206,046
Corporate general and administrative 5,068 2,640 13,587 5,740
Merger-related - 1,167 - 2,685
Depreciation and amortization 10,466 4,247 21,230 8,630
Interest expense 3,497 1,472 6,192 2,769
Other income, net (1,227) (1,324) (2,129) (2,708)
----------------- --------------- --------------- --------------
Total expenses 143,551 109,618 294,045 223,162
Income from continuing operations before
income tax expense 4,713 22,634 26,339 47,462
Income tax expense 3,240 8,163 14,486 17,799
----------------- --------------- --------------- --------------
Net income from continuing operations 1,473 14,471 11,853 29,663
Income (loss) from operations of discontinued business,
net of tax (1,765) 163 (1,760) 869
Loss on disposal of discontinued business, net of tax (7,333) - (8,421) -
----------------- --------------- --------------- --------------
Net income (loss) $ (7,625) $ 14,634 $ 1,672 $ 30,532
================= =============== =============== ==============
Earnings (loss) per share:
Basic:
Continuing operations $ 0.02 $ 0.17 $ 0.13 $ 0.36
Discontinued operations (0.10) - (0.11) 0.01
----------------- --------------- --------------- --------------
Net income (loss) $ (0.08) $ 0.17 $ 0.02 $ 0.37
================= =============== =============== ==============
Diluted:
Continuing operations $ 0.02 $ 0.16 $ 0.13 $ 0.33
Discontinued operations (0.10) - (0.11) 0.01
----------------- --------------- --------------- --------------
Net income (loss) $ (0.08) $ 0.16 $ 0.02 $ 0.34
================= =============== =============== ==============
Pro forma income data (from continuing operations);
Net income as reported $ 1,473 $ 14,471 $ 11,853 $ 29,663
Pro forma adjustment to provision for income taxes - 1,005 - 1,373
----------------- --------------- --------------- --------------
Pro forma net income $ 1,473 $ 13,466 $ 11,853 $ 28,290
================= =============== =============== ==============
Pro forma earnings per share:
Basic $ 0.02 $ 0.16 $ 0.13 $ 0.34
================= =============== =============== ==============
Diluted $ 0.02 $ 0.15 $ 0.12 $ 0.32
================= =============== =============== ==============
Basic weighted average shares outstanding 93,264 84,071 93,251 82,787
================= =============== =============== ==============
Diluted weighted average shares outstanding 94,938 90,632 95,202 89,373
================= =============== =============== ==============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
4
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------------------
2000 1999
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<S> <C> <C>
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES $ 5,228 $ 5,271
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (additions to) notes receivable (788) (187)
Business acquisitions, net of cash acquired (6,108) (15,591)
Purchases of property and equipment (16,390) (14,115)
Proceeds from dispositions of property and equipment 711 56
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Net cash used in investing activities (22,575) (29,837)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 59,100 72,000
Proceeds from notes payable 4,192 3,664
Payment of bank debt (54,000) (28,000)
Payment of notes payable and capitalized leases (7,437) (35,867)
Proceeds from stock issuances, net 17 24,735
Proceeds from exercise of stock options and warrants, net 107 2,744
Pre-merger equity transactions - (50)
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Net cash provided by financing activities 1,979 39,226
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Net increase (decrease) in cash and cash equivalents (15,368) 14,660
Cash and cash equivalents at beginning of period 48,906 43,593
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Cash and cash equivalents at end of period $ 33,538 $ 58,253
================== ====================
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
5
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited condensed
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 (Century) as of June 30, 2000 and December 31,
1999, and the results of their operations for the three and six-month
periods ended June 30, 2000 and 1999, and cash flows for the six-month
periods ended June 30, 2000 and 1999. The results of operations for
such interim periods are not necessarily indicative of the results for
the full year. The accompanying unaudited condensed consolidated
interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
reporting and with instructions to Form 10-Q, and accordingly do not
include all disclosures required by generally accepted accounting
principles. The 1999 condensed consolidated balance sheet was derived
from Century's audited consolidated balance sheet included in the
Company's annual report on Form 10-K for the year ended December 31,
1999.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 1999
financial statements to conform to the 2000 presentation.
2. ACQUISITIONS
During the second quarter of 2000, Century purchased one benefits and
insurance firm which was accounted for under the purchase method of
accounting. Accordingly, the operating results of the acquired company
have been included in the accompanying condensed consolidated financial
statements since the date of acquisition. The aggregate purchase price
of this acquisition was approximately $1.8 million, comprised of $1.0
million in cash and $0.8 million in notes to be paid over a two-year
period. The excess of the purchase price over fair value of the net
assets acquired (goodwill) was approximately $2.8 million, and is being
amortized over a 15-year period. As a result of the nature of the
assets and liabilities of the business acquired, there were no material
identifiable intangible assets or liabilities.
3. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents consist of funds held on deposit and
short-term highly liquid investments with a maturity of three months or
less at the date of purchase. At various times during the year, Century
had deposits with financial institutions in excess of the $100,000
federally insured limit.
Restricted cash represents funds on deposit from clients for which the
Company is administering and settling claims. A related liability for
these funds is recorded in accrued expenses in the balance sheet.
4. CONTINGENCIES
Century is involved in litigation, arising in the normal course of
business. While it cannot be predicted with certainty, management
believes that the outcome of such litigation will not have a material
adverse effect on Century's financial condition, results of operations
or cash flows. See "Part II - Other Information, Item 1. Legal
Proceedings" for additional information.
5. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", requires reporting the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the Balance Sheet.
Items considered other comprehensive income are the adjustments made
for unrealized holding gains and losses on available-for-sale
securities (primarily held by the discontinued operations) and foreign
currency translation adjustments. Comprehensive income (loss) for the
three months ended June 30, 2000 and 1999, was ($4.9 million) and $13.3
million, respectively. Comprehensive income for the six months ended
June 30, 2000 and 1999, was $4.3 million and $28.9 million,
respectively.
6
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
6. EARNINGS PER SHARE
For the periods presented, Century presents both basic and diluted
earnings per share. The following data shows the amounts (in thousands)
used in computing earnings per share and the effect on the weighted
average number of dilutive potential common shares. Included in
potential dilutive common shares are contingent shares, which represent
shares issued and placed in escrow that will not be released until
certain performance goals have been met or exceeded.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Denominator
Basic
Weighted average common
shares 93,264 84,071 93,251 82,787
---------------- --------------- ---------------- -----------------
Diluted
Warrants 21 6,020 35 6,032
Options 43 225 306 238
Contingent shares 1,610 316 1,610 316
---------------- --------------- ---------------- -----------------
Total 94,938 90,632 95,202 89,373
================ =============== ================ =================
</TABLE>
7. CONSOLIDATION AND INTEGRATION CHARGES
During the fourth quarter of fiscal 1999, Century'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 at least
60 office locations, the elimination of more than 200 positions
(including Corporate), and the divestiture of four small, non-core
businesses. Pursuant to the plan, Century recorded a consolidation and
integration pre-tax charge of $27.4 million, which included $4.8
million for severance and $9.4 million for obligations under various
noncancellable leases that were committed to prior to plan approval,
for which no economic benefit to Century would be subsequently
realized.
As a result of executive management changes (including the replacement
of Century's President and Chief Operating Officer) and certain
strategic changes in the first quarter of fiscal 2000, Century
revisited the extent of its planned integration and consolidation
initiatives and extended the timing of certain office consolidations
beyond one year. Century's Board of Directors approved the revision to
the plan on March 31, 2000. Accordingly, Century reduced approximately
$4.4 million of accruals originally provided for in the plan related to
the aforementioned noncancellable lease obligations. In addition,
Century recorded, on a pre-tax basis, net charges of $1.5 million for
severance, and $1.3 million for shared-service and consolidation
charges. Lastly, Century recorded an additional write-down of $1.0
million (pre-tax) relating to the divestiture of the four non-core
businesses previously announced. The net effect of the reduction of the
lease obligation accrual and the first-quarter 2000 consolidation and
integration charges was a net pre-tax credit of $643,000. During the
second quarter, Century recorded, on a pre-tax basis, net charges of
$212,000 for severance, $225,000 for lease costs, and $156,000 for
other consolidation-related charges. The net effect of the
consolidation and integration charges was $593,000 for the three-months
ended June 30, 2000. The net effect of the reduction of the lease
obligation accrual and consolidation and integration charges for the
six-months ended June 30, 2000 was a net pre-tax credit of $50,000.
7
<PAGE> 8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
7. CONSOLIDATION AND INTEGRATION CHARGES (continued)
Consolidation and integration reserve balances as of December 31, 1999,
activity during the six-month period ended June 30, 2000, and the
remaining reserve balances as of June 30, 2000, were as follows (in
thousands):
<TABLE>
<CAPTION>
Lease Consolidation Severance &
(1) Benefits (2)
--------------------- --------------------
<S> <C> <C>
Reserve balance at December 31, 1999 $ 9,400 4,150
Amounts charged to income - 2,829
Amounts utilized - (1,918)
Amounts adjusted (4,379) (1,382)
--------------------- --------------------
Reserve balance at June 30, 2000 $ 5,021 3,679
===================== ====================
</TABLE>
(1) Amount designated as "adjusted" is included in operating expense
in the accompanying condensed consolidated statement of income
for the six-month period ended June 30, 2000.
(2) Amounts designated as "charged to income" and "adjusted" are
included are included in corporate general and administrative
expenses in the accompanying condensed consolidated statement of
income for the six-month period ended June 30, 2000.
At June 30, 2000, Century had a $5.0 million reserve for lease
consolidation obligations, and a $3.7 million reserve for severance and
benefits, designated to cover 184 employees.
8. DISCONTINUED OPERATIONS
In April 1999, Century adopted a formal plan to divest its risk-bearing
specialty insurance segment, which is no longer part of Century's
strategic long-term growth objectives. The risk-bearing specialty
insurance segment, which includes Century Surety Company, Evergreen
National Indemnity Company, and Continental Heritage Insurance Company,
is reported as a discontinued operation and its net assets and results
of operations are reported separately in the unaudited condensed
consolidated financial statements. Revenues from the discontinued
operations for the three-month periods ended June 30, 2000 and 1999
were $10.7 million and $13.4 million, respectively, and $22.0 million
and $24.7 million for the six-month periods ended June 30, 2000 and
1999, respectively. On June 26, 2000, Century announced that it had
entered into a binding agreement for the sale of its risk-bearing
specialty insurance segment, as well as American Inspection and Audit
Services, Inc. and CSC Insurance Agency, Inc. with Avalon National
Corporation (ANC) and a consortium of financial entities for $31
million, subject to regulatory approval. On July 17, 2000, ANC assigned
its rights under the purchase agreement to Pro Finance Holding
Corporation. Based on the estimated proceeds at closing, Century
recorded an additional loss of $7.3 million in the second quarter of
2000, which includes the effect of recognizing $2.5 million of
unrealized losses on available-for-sale securities, previously
accounted for in our equity section in accordance with Financial
Accounting Standards No. 115. Century intends to use the proceeds from
the sale for debt reduction. Closing is expected to occur on or before
October 15, 2000.
8
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
9. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," established
standards for reporting selected information about operating segments,
products and services, geographic areas and major customers.
Century's business units have been aggregated into four reportable
segments: business solutions; benefits and insurance; performance
consulting and technology solutions services. Segment information for
the three and six-month periods ended June 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 2000
-------------------------------------------------------------------------------------------------
Business Benefits & Performance Technology Corporate
Solutions Insurance Consulting Solutions and Other Total
---------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 86,836 $ 47,238 $ 4,513 $ 9,677 $ - $ 148,264
Operating income (1) 14,328 8,742 837 (289) (1,101) 22,517
Corporate gen. and admin. (1) - - - - 5,068 5,068
Depreciation and amortization 1,717 761 39 125 7,824 10,466
Interest expense 261 62 - 4 3,170 3,497
Other expense (income), net (344) (686) (6) (469) 278 (1,227)
Pre-tax income (loss) $ 12,694 $ 8,605 $ 804 $ 51 $ (17,441) $ 4,713
For the Three Months Ended June 30, 1999
-------------------------------------------------------------------------------------------------
Business Benefits & Performance Technology Corporate
Solutions Insurance Consulting Solutions and Other Total
---------- ------------- -------------- ------------- ----------- -------------
Revenue $ 75,589 $ 42,977 $ 4,888 $ 8,798 $ - $ 132,252
Operating income 19,573 12,953 2,072 (645) (3,117) 30,836
Corporate gen. and admin. - - - - 2,640 2,640
Merger-related - - - - 1,167 1,167
Depreciation and amortization 1,245 734 29 85 2,154 4,247
Interest expense 20 220 - 61 1,171 1,472
Other expense (income), net (390) (517) 66 (68) (415) (1,324)
Pre-tax income (loss) $ 18,698 $ 12,516 $ 1,977 $ (723) $ (9,834) $ 22,634
For the Six Months Ended June 30, 2000
-------------------------------------------------------------------------------------------------
Business Benefits & Performance Technology Corporate
Solutions Insurance Consulting Solutions and Other Total
---------- ------------- -------------- ------------- ----------- -------------
Revenue $ 194,946 $ 94,111 $ 9,737 $ 21,690 $ - $ 320,384
Operating income (1) 45,753 18,556 2,529 (518) (1,101) 65,219
Corporate gen. and admin. (1) - - - - 13,587 13,587
Depreciation and amortization 3,305 1,342 77 244 16,262 21,230
Interest expense 327 130 8 2 5,725 6,192
Other income, net (517) (983) (14) (525) (90) (2,129)
Pre-tax income (loss) $ 42,638 $ 18,067 $ 2,458 $ (239) $ (36,585) $ 26,339
For the Six Months Ended June 30, 1999
-------------------------------------------------------------------------------------------------
Business Benefits & Performance Technology Corporate
Solutions Insurance Consulting Solutions and Other Total
---------- ------------- -------------- ------------- ----------- -------------
Revenue $ 162,329 $ 79,342 $ 8,845 $ 20,108 $ - $ 270,624
Operating income 44,973 18,642 3,642 438 (3,117) 64,578
Corporate gen. and admin. - - - - 5,740 5,740
Merger-related - - - - 2,685 2,685
Depreciation and amortization 2,417 1,432 54 169 4,558 8,630
Interest expense 133 378 - 147 2,111 2,769
Other income, net (692) (1,113) (3) (156) (744) (2,708)
Pre-tax income (loss) $ 43,115 $ 17,945 $ 3,591 $ 278 $ (17,467) $ 47,462
(1) includes unusual expenses and credits as discussed in Footnote 7 to the condensed consolidated financial statements.
</TABLE>
9
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Century Business Services, Inc. (Century) is a diversified services company,
which acting through its subsidiaries provides professional outsourced business
services to small and medium-sized companies, as well as individuals, government
entities, and not-for-profit enterprises predominantly throughout the United
States. Century provides integrated services in the following areas: accounting
and tax; employee benefits; wealth management; property and casualty insurance;
payroll; information systems consulting and human resource consulting. Century
also provides valuation; litigation advisory; performance consulting; government
relations; commercial real estate; wholesale insurance; healthcare consulting;
medical practice management; worksite marketing; and capital advisory services.
RESULTS OF OPERATIONS
---------------------
Revenues
Business service fees and commissions increased to $148.3 million for the
three-month period ended June 30, 2000, from $132.3 million for the comparable
period in 1999, an increase of $16.0 million, or 12.1%. Such increase was
primarily attributable to (i) Century's acquisitions completed subsequent to the
first quarter of 1999 that were accounted for under the purchase method of
accounting, which accounted for $11.6 million of such increase, and (ii)
internal growth. Business service fees and commissions increased to $320.4
million for the six-month period ended June 30, 2000, from $270.6 million for
the comparable period in 1999, an increase of $49.8 million, or 18.4%. Such
increase was primarily attributable to (i) Century's acquisitions completed
subsequent to 1999 that were accounted for under the purchase method of
accounting, which accounted for $28.3 million of such increase and (ii) internal
growth.
For the companies with a full period of operations for the three-month period
ended June 30, 2000 and 1999, Century achieved an internal growth rate of 3.4%.
For the companies with a full period of operations for the six-month period
ended June 30, 2000 and 1999, Century achieved an internal growth rate of 8.2%.
The internal growth rate is based on the increase in revenues of companies that
have a full period of operations for the three and six-month period ended June
30, 2000, including companies that are accounted for as pooling-of-interests, as
compared to the comparable periods in 1999.
Expenses
Total expenses increased to $143.6 million for the three-month period ended June
30 2000, from $109.6 million for the comparable period in 1999. As a percentage
of revenue, total expenses were 96.8% for the three-month period ended June 30,
2000 compared to 82.9% for the comparable period in 1999. Total expenses
increased to $294.0 million for the six-month period ended June 30 2000, from
$223.2 million for the comparable period in 1999. As a percentage of revenue,
total expenses were 91.8% for the six-month period ended June 30, 2000 compared
to 82.5% for the comparable period in 1999. Excluding consolidation and
integration charges (credits) of $593,000 and ($50,000) for the three and
six-month periods ended June 30, 2000, respectively, total expenses as a
percentage of revenue were 96.5% and 91.8% for the three and six-month period
ended June 30, 2000, respectively, and is primarily related to the change in the
goodwill amortization period from 40 years to 15 years adopted October 1, 1999,
and increased interest expense associated with Century's bank debt.
Operating expenses increased to $125.7 million for the three-month period ended
June 30, 2000, from $101.4 million for the comparable period in 1999, an
increase of $24.3 million, or 24.0%. Operating expenses increased to $255.2
million for the six-month period ended June 30, 2000, from $206.0 million for
the comparable period in 1999, an increase of $49.1 million, or 23.8%. As a
percentage of revenue, operating expenses for the three and six-month periods
ended June 30, 2000 were 84.8% and 79.6%, respectively, compared to 76.7% and
76.1% for the comparable periods. Excluding consolidation and integration
expenses, operating expenses as a percentage of revenue were 84.4% and 80.5% for
the three and six-month periods ended June 30, 2000. The increase in operating
expenses during 2000 are primarily due to acquisitions completed in 1999 and
2000 that were accounted for under the purchase method of accounting, increased
compensation costs as a percentage of revenues, and higher health care costs due
to unfavorable claims experience.
10
<PAGE> 11
Corporate general and administrative expenses increased to $5.1 million for the
three-month period ended June 30, 2000, from $2.6 million for the comparable
periods in 1999, an increase of $2.4 million. Corporate general and
administrative expenses increased to $13.6 million for the six-month period
ended June 30, 2000, from $5.7 million for the comparable period in 1999, an
increase of $7.8 million. Such increase was attributable to the expansion of the
corporate function to accommodate Century's infrastructure and corporate
initiatives, consulting and legal fees, and costs to implement and support the
LINCS initiative. Excluding consolidation and integration expenses which consist
primarily of costs related to severance payments incurred in connection with
Century consolidation initiatives, corporate general and administrative expenses
increased to $4.9 million and $10.9 million for the three and six-month periods
ended June 30, 2000, respectively, from $2.6 million and $5.7 million for the
comparable periods in 1999. Corporate general and administrative expenses
(excluding consolidation and integration expenses) represented 3.3% and 3.4% of
total revenue for the three and six-month period ended June 30, 2000, up from
2.0% and 2.1% for the comparable periods in 1999.
Century incurred merger-related expenses of $1.2 million and $2.7 million for
the three and six-month periods ended June 30, 1999. Merger-related expenses are
comprised primarily of professional fees incurred in transactions accounted for
as pooling-of-interests and the salaries of internal employees dedicated to
merger and acquisition activities. There were no merger-related expenses in 2000
as a result of the significant reduction in Century's acquisition program, and
there were no transactions recorded as pooling-of-interests in such period.
Depreciation and amortization expenses increased to $10.5 million for the
three-month period ended June 30, 2000, from $4.2 million for the comparable
periods in 1999, an increase of $6.2 million, or 146.4%. Depreciation and
amortization expenses increased to $21.2 million for the six-month period ended
June 30, 2000, from $8.6 million for the comparable periods in 1999, an increase
of $12.6 million, or 146.0%. As a percentage of total revenues, depreciation and
amortization expense was 7.1% and 6.6% for the three and six-month period ended
June 30, 2000, respectively, compared to 3.2% for the comparable periods in
1999. The increase in depreciation and amortization expense in 2000 is a result
of a) goodwill associated with acquisitions completed in 1999 and 2000, b) the
change in the goodwill amortization period from 40 years to 15 years beginning
October 1, 1999, and c) increased depreciation expense related to the Oracle
application placed into service on January 1, 2000, and other capital
expenditures. The change in the goodwill amortization period resulted in an
additional $3.6 million and $6.9 million of goodwill amortization expense for
the three and six-month periods ended June 30, 2000, respectively.
Century recorded income taxes from continuing operations of $3.2 million and
$14.5 million for the three and six-month periods ended June 30, 2000, and $9.2
million and $19.2 million (including pro forma adjustments) for the three and
six-month periods ended June 30, 1999. Including pro forma adjustments, the
effective tax rate increased to 68.7% from 40.5% for the three-month period
ended June 30, 2000 and 1999, respectively, and to 55.0% from 40.4% (including
pro forma adjustments) for the six-month period ended June 30, 2000 and 1999,
respectively. The increase in the effective tax rate is primarily attributable
to increased goodwill amortization, as a result of the change in our goodwill
amortization period from 40 years to 15 years effective October 1, 1999, the
majority of which is not deductible for tax purposes. Income taxes are provided
based on Century's anticipated annual effective rate.
The discontinued operation had an operating loss, after-tax, of $1.8 million
compared to net income of $163,000 for the three-month period ended June 30,
2000 and 1999, respectively, and a loss of $1.8 million compared to net income
of $869,000 for the six-month period ended June 30, 2000 and 1999, respectively.
The $1.8 million loss incurred in the second quarter of 2000 were a result of
general operating losses incurred and a write-off of deferred acquisition costs
related to its transportation line of business.
OTHER
-----
Total assets decreased to $772.7 million at June 30, 2000, from $787.3 million
at December 31, 1999, which is primarily attributable to the write-down of the
net assets of the discontinued operation in June 2000 discussed in Note 8 to the
Condensed Consolidated Financial Statements. Total liabilities decreased to
$259.4 million at June 30, 2000, from $274.2 million at December 31, 1999, which
is primarily attributable to the decrease in accrued expenses of $21.7 million
and a net increase in bank debt of $5.1 million. Total stockholders' equity
increased $154,000 during the six-month period ended June 30, 2000, and is
attributable to net income for the first six months of 2000 of $1.7 million, the
adjustment of $2.5 million for unrealized losses on available-for-sale
securities discussed in Footnote 8 to the Condensed Consolidated Financial
Statements, and a decrease in additional paid-in-capital of $4.1 million. The
decrease in paid-in-capital in the first quarter of 2000 is primarily related to
a change in the purchase price composition (i.e. cash and common stock) of an
acquisition that was completed near the end of 1999.
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LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the six-month period ended June 30, 2000, cash and cash equivalents
decreased $15.4 million to $33.5 million, from $48.9 million at December 31,
1999, as cash used in investing activities of $22.6 million exceeded cash
provided by operating activities of $5.2 million and cash provided by financing
activities of $2.0 million.
Cash used in investing activities during the six-month period ended June 30,
2000 were $22.6 million and consisted primarily of cash used in business
acquisitions and purchases of property and equipment. Significant purchases of
property and equipment in the first six months of 2000 are primarily
attributable to the purchase of software from Oracle and related capital costs
incurred to implement the enterprise-wide solution to integrate back office
operations.
Cash provided by financing activities during the six-month period ended June 30,
2000 were $2.0 million and consisted primarily of proceeds of $63.3 million from
the revolving credit facility and notes payable, less repayments of bank debt,
notes payable and capitalized leases of $61.4 million. The proceeds from these
financing activities were used for general corporate purposes and working
capital requirements.
Century is currently in violation of certain debt covenants under its credit
facility and is in discussions with its lenders with respect to a proposed
amendment to modify the debt covenants. The amendment would also provide
forbearance of enforcement of remedies, and management expects such amendment to
be completed by September 1, 2000. Until the amendment is completed, there
can be no assurance that the required majority of lenders needed to approve the
amendment will do so. Accordingly, the entire $149.1 million of debt is
considered current at June 30, 2000. Should the lenders call the loan in default
and demand full repayment, management believes that it has sufficient cash and
other collateral to repay the outstanding amount
FORWARD-LOOKING STATEMENTS
--------------------------
Statements included in the Form 10-Q, which are not historical in nature, are
forward-looking statements made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are
commonly identified by the use of such terms as "intends", "estimates",
"expects", "projects", "anticipates", "foreseeable future," "seeks", "believes",
and words and phrases 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 underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct. Factors that could cause actual
results to differ materially from the Century's expectations ("Cautionary
Statements") include: (i) Century's ability to acquire and finance additional
businesses; (ii) Century's ability to adequately manage growth; (iii) Century's
dependence on the current trend of outsourcing business services; (iv) Century's
dependence on the services of key employees; (v) Century's ability to realize
the full value of goodwill; (vi) the risk of professional errors and omissions;
(vii) the nature of the competitive and fragmented outsourcing industry; (viii)
market fluctuations in the values or returns on assets in Century's investment
portfolios; (ix) government regulations and interpretations are subject to
changes; (x) Century's principal shareholders have substantial control over its
operations; (xi) shares eligible for future sale could adversely affect the
price of Century's common stock; (xii) Century may not pay dividends; and (xiii)
Century's ability to manage risks associated with its discontinued specialty
insurance business, such as risk of inadequate insurance premiums,
underestimating reserves, and the risk that reinsurers may fail. All
forward-looking statements in this Form 10-Q are expressly qualified by the
Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
The Company's exposure to market risk, including interest rate risk, is
immaterial. If market interest rates were to increase or decrease immediately
and uniformly by 100 basis points from the levels at June 30, 2000, in each case
the impact on the Company's financial condition and results of operations would
be immaterial. The Company does not engage in trading market risk sensitive
instruments and does not purchase hedging instruments or "other than trading"
instruments that are likely to expose the Company to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
The Company has not issued debt instruments, entered into forward or futures
contracts, purchased options or entered into swaps. The Company'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 the Company could borrow funds under its Credit Facility.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the second quarter ended June 30, 2000, there were no material
developments in previously reported legal proceedings, except for the resolution
of the Devon Capital Management, L.P. lawsuit discussed below.
On August 3, 2000, the Company and Devon Capital Management, L.P. resolved their
lawsuit pending in the United States District Court for the Northern District of
Ohio. In connection with this resolution, the Company will pay Devon $23,000 and
will release to Devon 41,166 shares of the Company which had been previously
issued. All claims pending before the Court have been dismissed with prejudice.
In addition to the above described items, Century is from time to time subject
to claims and suits arising in the ordinary course of business. 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 Century.
ITEM 2. CHANGES IN SECURITIES
(c) Issuances of unregistered shares during the three-month period ended June
30, 2000, were as follows:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on May 12, 2000, 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 2003 Annual Meeting of Shareholders.
Shares For
----------
Michael G. DeGroote 58,287,737
Harve A. Ferrill 57,299,376
2) The approval of the appointment of KPMG LLP as independent accountants for
fiscal year 2000.
Shares For Shares Against
---------- --------------
59,609,765 1,381,701
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second
quarter ended June 30, 2000.
13
<PAGE> 14
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, 2000 By: /s/ Chris Spurio
------------------- ----------------
Chris Spurio
Vice President, Acting Chief Financial
Officer
14
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
EXHIBIT INDEX
-------------
EXHIBIT NUMBER:
27.1 Financial Data Schedule (SEC only)................................ 15
15
