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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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 (IRS EMPLOYER
OF INCORPORATION 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
THE NASDAQ STOCK MARKET
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 preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is approximately $267.8 million as of March 10, 2000. The number of
outstanding shares of the Registrant's common stock is 95,863,629 shares as of
March 10, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative to the
2000 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration statements.
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CENTURY BUSINESS SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
<S> <C>
Items 1 and 2. Business and Properties.......................................................... 3
Item 3. Legal Proceedings................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.............................. 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............. 15
Item 6. Selected Financial Data.......................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 17
Item 7A. Quantitative and Qualitative Information About Market Risk....................... 24
Item 8. Financial Statements and Supplementary Data...................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting 24
and Financial Disclosure.......................................................
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 25
Item 11. Executive Compensation........................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 28
Item 13. Certain Relationships and Related Transactions................................... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 28
</TABLE>
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THE FOLLOWING TEXT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS ANNUAL REPORT TO "CENTURY" OR THE
"COMPANY" SHALL MEAN CENTURY BUSINESS SERVICES, INC., A DELAWARE CORPORATION,
AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
Century is a diversified services company which, acting through its
subsidiaries, provides professional outsourced business services primarily to
small and medium-sized businesses, as well as individuals, governmental
entities, and not-for-profit enterprises throughout the United States and
Toronto, Canada.
Century offers integrated services through the following divisions:
- - - Business Solutions (accounting, tax, valuation, and advisory services)
- - - Benefits, Insurance, Wealth Management, and Payroll Solutions
- - - Performance Consulting Solutions
- - - Technology Solutions
- - - Specialty Insurance (classified as discontinued)
Century provides services through a network of more than 230 offices in 36
states and Toronto, Canada, plus approximately 560 Century Small Business
Solutions (CSBS) franchisee offices in 46 states. As of December 31, 1999,
Century served over 100,000 clients, of which approximately 45,000 are serviced
through the CSBS franchisee network.
Formed as a Delaware corporation in 1987 under the name Stout Associates,
Century was acquired by Republic Industries, Inc. in 1992. In April 1995,
Republic spun-off its hazardous waste operations (including Century's
predecessor company) to stockholders. Re-named Republic Environmental Systems,
Inc., Century began trading on the Nasdaq National Market under the symbol
"RESI" until June 24, 1996, when it began trading under the symbol "IASI"
anticipating the merger with Century Surety Company and Commercial Surety
Agency, Inc., which resulted in a change of its name to "International Alliance
Services, Inc." This name change signaled a move away from the hazardous waste
business. Century divested all remaining hazardous waste operations in 1997. On
December 23, 1997, Century changed its name to Century Business Services, Inc.
and began trading under the symbol "CBIZ."
Century initiated an acquisition program in November 1996 to expand its
operations rapidly in the professional outsourced business services industry.
Since that time, Century has acquired the businesses of 142 companies, 35 of
which were acquired in 1999. The majority of these acquisitions have been
accounted for under the purchase method of accounting. During 1999, Century's
acquisitions resulted in significant increases in goodwill. The excess of cost
over the fair value of net assets of businesses acquired (goodwill) was $379.9
million at December 31, 1999, representing approximately 48% of Century's
consolidated total assets. During the fourth quarter of 1999, Century shortened
its goodwill amortization period from periods not exceeding 40 years to 15
years, beginning October 1, 1999.
Century's principal executive office is located at 6480 Rockside Woods Blvd.,
South, Suite 330, Cleveland, Ohio 44131 and its telephone number is
216-447-9000.
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BUSINESS STRATEGY
Century's business strategy is to grow in the professional outsourced business
services industry by:
- - - cross-serving Century's business services to its existing customer base
- - - attracting new customers with its diverse business services offering
- - - realizing economies of scale through the integration of its business
services to combine its purchasing of products and services on a national
scale and reduce the costs of those products and services as a result of
volume discounts
Recognizing the need for an approach supporting the distribution of Century's
services throughout its nationally dispersed network of business services firms,
an organizational framework was developed in 1998. Within this organizational
framework, Century has established Biz Centers, leadership councils, and expert
networks to support its trusted advisors.
Although Century's acquisition program has slowed due to its focus on
integrating its acquired businesses, from time to time, Century may target
acquisitions in markets where it currently operates and where the prospects are
favorable to increase its market share to become a significant provider of a
comprehensive range of outsourced business services. Century's strategy is to
acquire selectively companies that generally:
- - - have a strong potential for cross-serving among Century's subsidiaries
- - - have strong and energetic entrepreneurial leadership
- - - have historic and expected future internal growth
- - - can add to the level and breadth of services offered by Century thereby
enhancing its competitive advantage over other outsourced business services
providers
Leaders of existing Century subsidiaries and contacts in the outsourced business
services industry have helped Century identify, evaluate and acquire businesses
in attractive markets. Acquisition candidates are evaluated by a comprehensive
process including operational, legal and financial due diligence reviews. As
opportunities are identified and tested against such criteria, Century may
acquire additional outsourced business providers throughout the United States.
ACQUISITIONS
During 1999, Century continued its strategic acquisition program, purchasing the
businesses of 35 complementary companies. These acquisitions comprise the
following:
- - - Business Solutions - twenty-one acquisitions
- - - Benefits, Insurance, Wealth Management, and Payroll Solutions - eleven
acquisitions
- - - Performance Consulting Solutions - one acquisition
- - - Technology Solutions - two acquisitions
Thirty of the acquisitions were accounted for under the purchase method of
accounting, and accordingly, the operating results of the acquired companies
have been included in the accompanying consolidated financial statements since
the dates of acquisition. The aggregate purchase price of these acquisitions was
approximately $77.7 million, comprised of $29.7 million in cash, $0.5 million in
assumed liabilities, and 5.6 million shares of restricted common stock
(estimated fair value of $47.5 million at acquisition). The aggregate purchase
price excludes future contingent consideration of up to $21.7 million, comprised
of $10.1 million in cash and notes and 1.5 million shares of restricted common
stock (estimated stock value of $11.6 million at acquisition), which is based on
the acquired companies' ability to meet or exceed certain performance goals. The
aggregate purchase price, excluding future contingent consideration, has been
allocated to the net assets of the acquired companies based upon their
respective fair market values. The excess of the purchase price over fair value
of net assets acquired (goodwill) approximated $71.9 million and is being
amortized over 15 years. As a result of the nature of the assets and liabilities
of the businesses acquired, there were no material identifiable intangible
assets or liabilities. The remaining five acquisitions were accounted for under
the pooling-of-interests method of accounting. Century exchanged 6.7 million
shares of its common stock for all of the respective common stock of these five
combined entities. See Footnote 2 to the consolidated financial statements
contained herein.
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OUTSOURCED BUSINESS SERVICES
Through its subsidiaries, Century provides a wide range of integrated services
primarily to small and medium-sized businesses, as well as individuals,
governmental entities, and not-for-profit enterprises throughout the United
States and Toronto, Canada. Century's goal is to be a leading provider of
outsourced business services within its target markets. Century's strategies to
achieve this goal include:
- - - continuing to provide clients with a broad range of high-quality products
and services
- - - continuing to expand locally through internal growth by:
- increasing the number of clients it serves
- increasing the number of services it provides to existing clients
- from time to time, completing acquisitions to enhance its national
presence or expand its service offerings in a target market
The following is a description of the outsourced business services currently
offered by Century.
Business Solutions. Century offers tax planning and preparation, cash flow
management, strategic planning, consulting services, and record-keeping
assistance. In addition to federal, state and local tax return preparation,
Century provides tax planning based on financial and investment alternatives and
assists in appropriate tax structuring of business transactions such as mergers
and acquisitions. Century also offers quarterly and year-end payroll tax
reporting, corporate, partnership and fiduciary tax planning and return
preparation. Century offers small and medium-sized businesses the opportunity to
outsource their back-office functions and many of Century's subsidiaries serve
as outsourced chief financial officers to their clients. Century also offers
financial investment analysis, succession planning, retirement planning, estate
planning, and profitability, operational and efficiency enhancement consulting
to a number of specialized industries. Century does not currently offer and does
not intend to offer audit services in the future and does not purchase the
"audit divisions" of any accounting businesses it acquires.
Century offers appraisals and valuations of commercial tangible and intangible
assets and valuations of financial securities. Century conducts real estate
valuations for financing feasibility, marketability and market value studies and
performs business enterprise and capital stock valuations for mergers and
acquisitions, estate planning, employee stock ownership trusts, sale, purchase
and litigation purposes. Century assists in asset allocation issues, fixed asset
insurance matters, fixed asset tracking, specialized valuation consulting,
investment transfer planning and other valuation services.
Century and its subsidiaries maintain joint-referral relationships and service
agreements with licensed CPA firms under which Century subsidiaries provide
administrative services (including office, bookkeeping, accounting and other
administrative services, preparing marketing and promotion materials, and
leasing administrative and professional staff) in exchange for a fee. The CPA
firms with which Century and its subsidiaries maintain such agreements are, for
example, those that have reorganized in order to merge their nonattest (any
services other than those which only licensed certified public accountants,
licensed public accountants, or licensed CPA or PA firms may perform in
accordance with accountancy laws) business services activities with and into
Century subsidiaries. Under these agreements, each party has agreed to maintain
its own liability and risk of loss in connection with performance of its
respective services.
Provisions of the services agreements between Century and its subsidiaries and
the licensed firms with which it maintains such agreements may constrain
Century's flexibility to modify its operational structure in order to respond to
changes in the regulatory environment. Limitations on Century's ability to
comply with applicable laws could impair its relationship with the licensed
firms or their clients, harm Century's business or reduce its revenues or
earnings. Legislative changes may also expand or contract the types and amounts
of business services that are required by individuals and businesses. There can
be no assurance that future laws will provide the same or similar opportunities
for business consulting and management services to individuals and businesses
that exist today. See "Risk Factors-- Restrictions imposed by independence
requirements and conflict of interest rules limit the clients to whom we and
attest firms with which we have contractual relationships may provide
attestation services."
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Benefits, Insurance, Wealth Management, and Payroll Solutions. Century offers
comprehensive employee benefits, brokerage, consulting services, and
administrative services. These include the design, implementation and
administration of qualified plans, including 401(k) plans, profit sharing plans,
defined benefit plans, money purchase plans and actuarial services. Century also
assists in the choice of health and welfare benefits such as group health
insurance plans, dental and vision care programs, group life insurance programs,
accidental death and dismemberment or disability programs, COBRA administration
and voluntary insurance programs, health care and dependent care spending
accounts and premium reimbursement plans. Century offers communications services
to inform and educate employees about their benefit programs. Century also
offers executive benefits consulting on non-qualified retirement plans and
business continuation plans. Moreover, several of Century's subsidiaries offer
wealth management services, including Registered Investment Advisory Services,
including Investment Policy Statements (IPS), mutual fund selection based on IPS
and ongoing mutual fund monitoring.
Century entered into an agreement in 1998 to form a strategic alliance with
National Planning Corporation, an affiliate of Jackson National Life Insurance
Company, for the development and distribution of financial and insurance
products. National Planning Corporation, a full-service securities
broker-dealer, will provide Century's large number of licensed brokers with
training, compliance/supervision, operational support and assistance in the
development and distribution of customized financial and insurance products.
This alliance will enable Century's licensed brokers to provide their clients
with private label and co-branded financial and insurance services and products.
Century processes time and attendance data to calculate and produce employee
paychecks, direct deposits and reports for its clients. Century's system is
highly configurable to meet the specialized needs of each client yet maintains
the ability to provide high-volume processing. Century's system integrates with
the client's general ledger, human resources and time attendance systems. Many
sophisticated features, including the automatic enrollment and tracking of paid
time off, pro-ration of compensation for new hires, integrated garnishment
processing, escrow services and funds administration services are available.
Century assumes responsibility for payroll and attendant record-keeping, payroll
tax deposits, payroll tax reporting and all federal, state, county and city
payroll tax reports (including 941s, 940s, W-2s, W-3s, W-4s and W-5s), state
unemployment taxes, employee file maintenance, unemployment claims and
monitoring and responding to changing regulatory requirements. Century also
represents clients before tax authorities in payroll tax disputes and inquiries.
Performance Consulting Solutions. Century offers assistance with the development
and implementation of strategies and programs to manage change and improve
bottom-line results. Various methods, including executive coaching,
instructional design, training delivery, and leadership development are used to
achieve these goals. Century's performance consulting services help companies
define immediate and long-term goals, pinpoint barriers to success, and
implement performance improvement processes.
Technology Solutions. Century offers a wide range of information technology
services, from creating strategic technology plans to developing and
implementing software and hardware solutions. Century provides strategic
technology planning, project management, development, design and implementation
of both wide access networks and local access networks, and accounting software
selection and implementation. Century utilizes a methodology in which business
needs drive technology, leading to appropriate technical solutions for Century's
small and medium-sized information technology clients.
SALES AND MARKETING NETWORK AND ACCOUNT MANAGEMENT
Century's key competitive factors in obtaining clients for business services
are:
- - - a strong existing sales network and marketing program
- - - established relationships and the ability to match client requirements with
available services
- - - products at competitive prices
Century believes that by combining a local entrepreneurial marketing strategy
and the name and resources of a nationally branded company, it will be able to
maximize its market penetration. Century expects that as it expands through
internal growth and acquisitions, it can take advantage of economies of scale in
purchasing a range of services and products and cross-serving new products and
services to existing clients who do not currently utilize all of the services
Century offers.
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COMPETITION
The professional outsourced business services industry is a highly fragmented
and competitive industry, with a majority of industry participants (such as
accounting, employee benefits, payroll firms or PEOs) offering only one or a
limited number of services. Competition is based primarily on customer
relationships, range and quality of services or product offerings, customer
service, timeliness and geographic proximity. Century competes with a small
number of multi-location regional or national operators and a large number of
relatively small independent operators in local markets. Century's competitors
in the professional outsourced business services industry include independent
consulting services companies, divisions of diversified enterprises, insurance
carriers and banks. Some of these competitors are public companies and some may
have greater financial resources than Century. Century also faces competition
for acquisition candidates from these companies, many of whom have acquired a
number of various types of business service providers in recent years.
Century believes that it will be able to compete effectively based on its:
- - - broad range of high-quality services and products
- - - knowledgeable and trained personnel
- - - entrepreneurial culture
- - - large number of locations
- - - operational economies of scale.
CUSTOMERS
Century provides professional outsourced business services to over 100,000
clients, of which approximately 45,000 are serviced through the CSBS franchisee
network. Century's clients typically have fewer than 500 employees and prefer to
focus their resources on operational competencies while allowing Century to
provide non-core administrative functions. In many instances, outsourcing
administrative functions allows clients to enhance productivity, reduce costs,
and improve service, quality, and efficiency by focusing on the client's core
business. Depending on a client's size and capabilities, it may choose to
utilize some or many of Century's broad array of services, which it typically
accesses through a single Century representative.
None of Century's major business services groups has a single homogeneous client
base. Rather, Century's clients come from a large variety of industries and
markets, and no one customer individually comprises more than 1% of Century's
total consolidated revenue. Management believes that such diversity helps to
insulate Century from a downturn in a particular industry. In addition,
Century's clients are focused on quality and quantity of services and
established relationships. Nevertheless, economic conditions among selected
clients and groups of clients may have a temporary impact on the demand for such
services.
REGULATION
Century's outsourced business services are vulnerable to legislative changes
with respect to provision of payroll, benefits administration and insurance
services, pension plan administration, tax, accounting, and specialty insurance.
Accountancy laws, regulations and codes of ethics could change or be interpreted
in a manner that restricts Century's operations. Century can not ensure that the
laws, regulations or codes of ethics of any state, their interpretations, state
enforcement policies and practices and other elements of the regulatory
environment will not change so as to materially restrict Century's operations.
Accordingly, Century's ability to continue to operate in, or expand its
operations in or to, some states may depend on its flexibility to modify its
operational structure in response to these changes.
Century's specialty insurance operation, which is classified as discontinued, is
vulnerable to both judicial and legislative changes. Judicial expansion in terms
of coverage can increase risk coverage beyond levels contemplated in the
underwriting and pricing process. Coverages established by statute may be
lowered or eliminated by legislative or administrative changes of law. Most
surety bonds exist because they are required by government agencies. When
governments change the threshold for requiring surety, the market for surety
bonds is directly affected.
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DISCONTINUED OPERATIONS - SPECIALTY INSURANCE SERVICES
In April 1999, Century's Board of Directors determined that the risk-bearing
specialty insurance segment of Century, which includes Century Surety Company,
Continental Heritage Insurance Company and Evergreen National Indemnity (The CSC
Group), was no longer part of Century's strategic long-term growth objectives.
As a result, the Board of Directors began the process of examining available
alternatives, including the sale of the division in whole or part, the spin-off
of the division to stockholders, or other similar transactions.
Century provides specialty insurance and bonding services primarily to small and
medium-sized companies throughout the United States. Century's insurance and
bonding business is focused on niche insurance and surety coverages known as
"non-standard" or specialty coverages. These terms refer to risks regarded as
higher than standard or normal risks and risk groups regarded as too small or
too specialized to permit profitable underwriting by larger, "standard market"
insurance companies. Century employs reinsurance to limit its exposure on
policies and bonds.
Century offers commercial product lines for a wide variety of specialty risk
groups, including but not limited to small construction; restaurants, bars, and
taverns; small commercial and retail establishments; and sun tanning salons.
Century's commercial product lines business is produced by a network of brokers
and agents. In late 1997, Century implemented a strategy to establish regional
underwriting offices, in an effort to market and service new business more
efficiently.
Century's specialty insurance subsidiaries employ reinsurance to limit exposure
on the policies and bonds they write. Although the ceding of reinsurance does
not discharge an insurer from its primary legal liability to a policyholder, the
reinsuring company assumes a portion of the liability. Reinsurance programs
include "treaties" that cover all business in a defined class and "facultative"
reinsurance that covers individual risks. Century generally retains from $50,000
to $200,000 of each commercial line anticipated risk, depending on the program.
Numerous domestic and international reinsurers support these various programs in
different combinations. Generally, Century's reinsurers are rated A- or better
by A.M. Best, a leading rating agency of insurance companies and reinsurers, and
demonstrate capital and surplus in excess of $120 million (collectively in
excess of $30 billion). Cessions are diversified so that most reinsurance
treaties (excluding facultative arrangements) are supported by more than one
reinsurer and no one reinsurer participates in all of Century's reinsurance
programs.
In marketing its specialty insurance services, Century attempts to identify and
exploit non-standard niches where management believes the actual risk is
significantly less than the perceived risk at which the coverage is defined and
priced, or where Century (because of its smaller size and lower overhead) is
able to underwrite coverages more economically than larger carriers. Many
non-standard insurance products can be marketed on an excess and surplus lines
basis, which means that the carrier is not fully admitted in a given state but
instead satisfies a less restrictive threshold of regulatory scrutiny, known as
"eligibility," to write excess and surplus lines (E&S). E&S eligibility offers
Century much more flexibility than it would have as an admitted carrier,
including exemption from rate and form filing requirements that apply to
admitted carriers, and the ability to adjust prices and coverages faster than
admitted carriers. Where competitive or regulatory requirements necessitate the
use of admitted carriers, Century uses its admitted subsidiaries, thereby
reaching a market of 42 states. Century employs reinsurance arrangements to
market certain products in all 50 states.
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LIABILITY INSURANCE
Century carries commercial general, automobile, workers' compensation, errors
and omission, directors and OFFICERS, fiduciary, and employer's liability
insurance as required by law in the various states in which operations are
conducted and umbrella policies to provide excess limits of liability over the
underlying limits contained in the commercial general liability, automobile
liability and employer's liability policies.
EMPLOYEES
At December 31, 1999, Century employed approximately 5,500 employees. Century
considers its relationships with its employees to be good.
SEASONALITY
Century's accounting and tax practice is subject to seasonality related to the
heavy volume of tax return preparation in the first four months of the year.
Century estimates that its accounting and tax practice generates approximately
30% of its revenue in the first quarter of the year.
PROPERTIES
Century's corporate headquarters is located at 6480 Rockside Woods Blvd., South,
Suite 330, Cleveland, Ohio 44131, in leased premises. Some of Century's property
and equipment are subject to liens securing payment of indebtedness of Century
and its subsidiaries. Century and its subsidiaries also lease 232 offices in 36
states and 1 in Toronto, Canada, as well as office equipment and company
vehicles. Century believes that its facilities are sufficient for its needs.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Annual
Report, including without limitation, " Business and Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding Century'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," "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 uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Among the key factors that may have a
direct bearing on Century's results of operations and financial condition are
those discussed below under "Risk Factors."
RISK FACTORS
The following are factors that may affect our actual operating results and could
cause results to differ materially from those in any forward-looking statements.
There may be other factors, and new risk factors may emerge in the future. You
should carefully consider the following information.
WE MAY NOT BE ABLE TO ACQUIRE AND FINANCE ADDITIONAL BUSINESSES.
We completed a significant number of acquisitions in 1998 and 1999. While we
have slowed our strategic acquisition program, we would like to continue to grow
through acquisitions of complementary businesses. However, we cannot be certain
that we will be able to continue identifying appropriate acquisition candidates
and acquire them on satisfactory terms, if at all. We cannot assure you that
such acquisitions, even if obtained, will perform as expected or will contribute
significant revenues or profits. In addition, we may also face increased
competition for acquisition opportunities, which may inhibit our ability to
complete transactions on terms that are favorable to us.
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We have traditionally financed our acquisitions by using our common stock as a
significant portion of the purchase price. However, as the value of our common
stock has markedly declined in recent months, or if potential acquisition
candidates are otherwise unwilling to accept common stock as a part of the
purchase price, then we may have to use more of our cash resources, if
available, to acquire new businesses. If such cash resources are not available,
our growth through acquisitions may be limited to the extent that we are not
able to raise additional capital through debt or equity financings. We believe
we currently have funds available under our bank line of credit to fund our
working capital needs; however, we cannot be certain that we will be able to
maintain this line of credit, access the public securities markets or obtain
other financing for acquisitions.
WE MAY NOT BE ABLE TO ADEQUATELY MANAGE OUR GROWTH.
Our business has grown significantly in size and complexity. Our continued
growth depends to a significant degree on our ability to successfully use our
existing infrastructure to perform services for other clients, as well as on our
ability to develop and successfully implement new marketing methods or channels
for new services. Our continued growth also depends on a number of other
factors, including our ability to:
- - - maintain the high quality of the services that we provide to our customers;
- - - integrate the acquired businesses within the Century group of companies;
- - - increase the number of services provided to our existing customers;
- - - recruit, motivate and retain qualified personnel; and
- - - economically train existing sales representatives or recruit new sales
representatives.
Our continued growth will also require us to implement enhanced operational and
financial systems. We cannot assure you that we will be able to manage our
expanding operations effectively or that we will be able to maintain our growth.
We intend to operate our business units through an integrated management
structure, with local management retaining responsibility for the profitability
and growth of their respective businesses. If proper financial reporting systems
are not implemented with appropriate controls, there may be inconsistent
operating and financial practices at various business units which may harm our
financial condition or results of operations.
WE EXPERIENCE SLOWER COLLECTIONS IN OUR PROFESSIONAL SERVICES OPERATIONS, WHICH
MAY AFFECT OUR LIQUIDITY.
Professional services firms like us often experience higher average accounts
receivable days outstanding than businesses in many other industries. We are
working to reduce the average number of days outstanding for our accounts
receivable. If we are unable to reduce the amount of time it takes to collect
for services rendered, this may affect our liquidity.
WE ARE DEPENDENT ON THE CURRENT TREND OF OUTSOURCING BUSINESS SERVICES.
Our business and growth depend in large part on the trend toward outsourcing of
business services. We can give you no assurance that this trend in outsourcing
will continue. Current and potential customers may elect to perform such
services with their own employees. A significant reversal of, or a decline in,
this trend would have a material adverse effect on our business.
WE ARE DEPENDENT ON THE SERVICES OF OUR EXECUTIVE OFFICERS.
Our success depends in large part upon the abilities and continued service of
our executive officers and other key employees. We cannot assure you that we
will be able to retain the services of our executive officers and other key
employees. If we cannot retain the services of our executive officers and other
key personnel, there could be a material adverse effect on our business. We
generally have employment agreements and non-competition agreements with key
personnel. Courts, however, may at times be reluctant to enforce certain
provisions of such non-competition agreements. In addition, many of our
executive officers and other key personnel are either participants in our stock
option plan or holders of a significant amount of our common stock. We believe
that these interests provide additional incentives for these key employees to
remain with us. In order to support our growth, we will need to effectively
recruit, hire, train and retain additional qualified management personnel. Our
inability to attract and retain necessary personnel could have a material
adverse effect on our business, financial condition and results of operation.
10
<PAGE> 11
WE MAY NOT REALIZE THE VALUE OF OUR GOODWILL.
Recent acquisitions have increased the amount of goodwill on our financial
statements. Goodwill is the excess of the cost over the fair value of the net
identifiable assets of the businesses that we have acquired. We anticipate that
such increases will continue if we make future acquisitions. At December 31,
1999, goodwill was $379.9 million. During the fourth quarter of 1999, Century
shortened its goodwill amortization period from periods not exceeding 40 years
to 15 years, beginning October 1, 1999. We may not realize the full value of our
goodwill. Any future determination requiring a write-off of a significant
portion of goodwill could have a material adverse effect on our business,
financial condition and results of operations.
WE COULD BE HELD LIABLE FOR ERRORS AND OMISSIONS.
All of our professional business services entail an inherent risk of
professional malpractice and other similar claims. Therefore, we maintain errors
and omissions insurance coverage. Although we believe that our insurance
coverage is adequate, we cannot be certain that actual future claims would not
exceed the coverage amounts. If we have a large claim on our insurance, the
rates for such insurance may increase, but contractual arrangements with clients
may constrain our ability to incorporate such increases into service fees. Such
insurance rate increases, as well as any underlying malpractice claim, could
have a material adverse effect on our business, financial condition and results
of operations.
THE OUTSOURCING INDUSTRY IS COMPETITIVE AND FRAGMENTED.
We face competition from a number of sources in both the outsourced business
services industry and the specialty insurance industry. Competition in both
industries has led to consolidation of many large companies that may have
greater financial, technical, marketing and other resources than us. In addition
to these new large companies, we face competition in the outsourced business
services industry from in-house employee services departments, local outsourcing
companies and independent consultants, as well as new entrants into our markets.
We cannot assure you that, as our industry continues to evolve, additional
competitors will not enter the industry or that our clients will not choose to
conduct more of their business services internally or through alternative
business services providers. Although we intend to monitor industry trends and
respond accordingly, we cannot assure you that we will be able to anticipate and
successfully respond to such trends in a timely manner. We cannot be certain
that we will be able to compete successfully against current and future
competitors, or that competitive pressure will not have a material adverse
effect on our business, financial condition and results of operations.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER OUR OPERATIONS.
As of March 15, 2000, the following groups owned the following aggregate amounts
and percentages of our common stock, including shares that may be acquired by
exercising options or warrants:
- - - approximately 16 million shares, representing 16.39% of all our outstanding
common stock, were owned by Mr. DeGroote, Chairman and Chief Executive
Officer;
- - - approximately 7.6 million shares, representing 7.79% of all our outstanding
common stock, were owned by Mr. Huizenga, a principal stockholder; and
- - - approximately 24.88 million shares, representing 24.7% of all our
outstanding common stock, were owned by our executive officers, directors,
and Mr. Huizenga, as a group.
Because of their stock ownership, these persons can substantially influence
actions that require the consent of a majority of our outstanding shares,
including the election of directors.
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<PAGE> 12
WE HAVE SHARES ELIGIBLE FOR FUTURE SALE THAT COULD ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Future sales or issuances of common stock, or the perception that sales could
occur, could adversely affect the market price of our common stock and dilute
the percentage ownership held by our stockholders. We have authorized
250,000,000 shares, and have issued and outstanding approximately 96 million
shares. More than 47 million of these shares have been issued in connection with
acquisitions. As part of many acquisition transactions, the shares were
contractually restricted from sale for periods up to two years, several of which
expired in 1999. Once those contractual restrictions fall away, we cannot be
sure when sales will occur, how many shares will be sold, or the effect that
sales may have on the market price of our common stock. As of March 15, 2000, we
have registered under the Securities Act the following shares of common stock
for the following purposes:
- - - 12.2 million shares, of which approximately 11,444,775 million shares
remain available for resale from time to time by selling stockholders under
various shelf registration statements which are less than one year old;
- - - $125 million in shares of our common stock, debt securities, and warrants
to purchase common stock or debt securities, of which $100 million remain
available to be offered from time to time by us to the public under our
universal shelf registration statement; and
- - - 15 million shares of our common stock, all of which remain available to be
offered from time to time by us in connection with acquisitions under our
acquisition shelf registration statement.
WE MAY NOT PAY DIVIDENDS.
We have not paid cash dividends on our common stock since April 27, 1995, and we
do not anticipate paying cash dividends in the foreseeable future. Our board of
directors decides on the payment and level of dividends on common stock. The
board's decision is based on our results of operations and financial condition
among other things. In addition, under our credit facility, we cannot pay cash
dividends without the prior written consent of the lenders. We currently intend
to retain future earnings to finance the ongoing operations and growth of the
business. See "Dividend Policy."
RESTRICTIONS IMPOSED BY INDEPENDENCE REQUIREMENTS AND CONFLICT OF INTEREST RULES
LIMIT THE CLIENTS TO WHOM WE AND ATTEST FIRMS WITH WHICH WE HAVE CONTRACTUAL
RELATIONSHIPS MAY PROVIDE ATTESTATION SERVICES.
We have entered into administrative services agreements with separate attest
firms owned by the CPA owners of each professional services firm under which we
provide professional staffing and other services. Revenues and income from these
agreements are reflected in our financial statements.
With respect to attest firm clients that are required to file audited financial
statements with the SEC, the SEC staff views us and the attest firms with which
we have contractual relationships as a single entity in applying independence
rules established by the accountancy regulators and the SEC. According to the
SEC staff, we are required to abide by all of the independence rules that the
attest firms must follow in order to be independent of an SEC reporting attest
client. According to the SEC staff, these independence rules prohibit us, and
our officers, directors, affiliates and significant stockholders, to the extent
an attest firm is so prohibited, from:
- - - holding any financial interest in an SEC reporting attest client,
- - - entering into any business relationship with an SEC reporting attest
client, or
- - - selling any services to an SEC reporting attest client.
In addition, under these rules, the SEC staff views an attest firm and us as
lacking independence with respect to:
- - - an SEC reporting attest client where that client, or its directors,
officers, affiliates or significant stockholders, own stock in us or our
affiliates, or
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<PAGE> 13
- - - entities involved in an offering of our stock or in making a market
for, or otherwise facilitating the trading of, our stock in the
secondary market, including any entity that is a member of a syndicate
underwriting an offering of our stock, that is a broker-dealer
exercising discretionary buy and sell authority over customer accounts
holding significant positions in our stock, or that employs securities
analysts that follow us.
We have regularly contacted, and continue to contact, state accountancy
regulators in jurisdictions in which we operate for approval of our business
services model. To date, no state accountancy regulatory authority has
prohibited our operations in any jurisdiction. In addition, we and the attest
firms have agreed to implement policies and procedures designed to enable us to
maintain independence in accordance with applicable standards. These procedures
include independence screening in connection with the selection of attest
clients as well as periodic confirmations of independence by officers, directors
and professionals of us, the attest firms and our clients.
There can be no assurance that following the policies and procedures implemented
by us and the attest firms will enable us and the attest firms to avoid
circumstances that would cause us and them to lack independence from an SEC
reporting attest client. If, as a result of the independence rules, we or the
attest firms are required to discontinue attestation services for existing or
potential future clients, then our revenues could decline. To date, revenues
derived from attestation services performed for SEC reporting clients have not
been material to us.
THE FOLLOWING ARE RISKS ASSOCIATED WITH OUR SPECIALTY INSURANCE SERVICES,
CLASSIFIED AS A DISCONTINUED OPERATION.
THE INSURANCE PREMIUMS THAT WE CHARGE MAY BE INADEQUATE. When we set the
premiums for our insurance policies, we look at the premiums we have set in the
past and whether those premiums were adequate to cover our losses. There is
always the risk, however, that we may not set the premiums for insurance high
enough to cover all of our losses. A loss that is larger than the amount that we
receive from premiums would have a material adverse effect on our business,
financial condition and results of operations.
WE MAY UNDERESTIMATE RESERVES. When we decide the amount of reserves necessary
to cover our insurance losses, we use past experience to estimate the losses to
be covered in a given year. In addition, our outside actuaries review our
estimates annually. In recent years, these actuaries have stated that our
estimates were accurate. We cannot be sure, however, that such estimates, $84.5
million as of December 31, 1999, will be enough to cover our ultimate insurance
liability. If these estimates are inadequate, we could suffer losses that would
have a material adverse effect on our business, financial condition and results
of operations.
OUR REINSURERS COULD FAIL. After we issue an insurance policy, we take out
insurance from a reinsurer against any losses we might suffer under such policy.
We depend heavily on reinsurers. If one or more reinsurers fail, we will have to
cover any losses that would have been covered by them. Therefore, a failure of
one or more of our reinsurers could have a material adverse effect on our
business, financial condition and results of operations. Even if all our
reinsurers remain solvent, we can only estimate how much reinsurance we need. We
base our assumptions about the amount of reinsurance we need on past experience.
If we underestimate how much reinsurance we need, we will suffer losses. These
losses would have a material adverse effect on our business, financial condition
and results of operations.
WE COULD EXPERIENCE INVESTMENT LOSSES. Our solvency and profitability are
maintained, in part, by investing our insurance-related assets. In order to
minimize the risk of loss in any one investment, we do the following:
- - - invest primarily in debt instruments of government agencies and
corporate entities with quality ratings of B or better;
- - - invest in a range of investments;
- - - have an investment committee that oversees all investments; and
- - - employ professional investment advisors who provide general investment
advice as well as advice on individual investments.
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<PAGE> 14
As of December 31, 1999, approximately 99% of Century's investments of
insurance-related assets were in debt instruments of government agencies and
corporate entities with quality ratings of B or better. Despite these measures,
we cannot assure you that we will not have any losses on our investments. A
series of losses in our investment portfolio could have a material adverse
effect on our business, financial condition and results of operations.
GOVERNMENTAL REGULATIONS AND INTERPRETATIONS ARE SUBJECT TO CHANGES. We are
affected by changes in the law in two primary ways. First, changes in the law
often result in changes in the amount or the type of business services required
by businesses and individuals. We cannot be sure that future laws will provide
the same or similar opportunities for us to provide business consulting and
management services to businesses and individuals. Second, our specialty
insurance business is affected by changes to surety bond coverage requirements.
For instance, if the demand for surety bonds decreases, there could be a
material adverse effect on our business, financial condition and results of
operations.
ITEM 3. LEGAL PROCEEDINGS
In September 1999, three purported stockholder class-action lawsuits were filed
in the United States District Court for the Northern District of Ohio against
Century and certain of its current and former directors and officers.
Subsequently, these three actions were consolidated into a single case, Darby,
et al. v. Century Business Services, Inc., et al., filed January 28, 2000,
alleging violations of the Securities Exchange Act of 1934 in connection with
certain statements made during the period from February 6, 1998 to November 23,
1998, by, among other things, misstating revenue run rates, improperly
accounting for certain acquisitions, improperly amortizing goodwill, and failing
to disclose certain adverse information of which the defendants were aware.
In February 2000, two additional purported stockholder class-action lawsuits -
Gochman, et al. v. Century Business Services, Inc., et al. and Korn, et al. v.
Century Business Services, Inc., et al. - were filed in the United States
District Court for the Northern District of Ohio and one additional purported
stockholder class-action lawsuit - Albert, IV, et al. v. Century Business
Services, Inc., et al. - was filed in the United States District Court for the
District of Maryland, against Century and certain of its current and former
directors and officers. The plaintiffs in these cases alleged violations of the
Securities Exchange Act of 1934 in connection with certain statements made
during the period from February 9, 1999 to January 28, 2000, by, among other
things, improperly amortizing goodwill and failing adequately to monitor changes
in operating results. Century expects that the Albert action will be transferred
to the United States District Court for the Northern District of Ohio, that all
of the actions will be consolidated, and an amended complaint will be filed.
None of these events has yet taken place.
On March 2, 2000, an additional purported stockholder class-action lawsuit -
Marsh, et al. v. Century Business Services, Inc., et al. - was filed in the
United States District Court for the Northern District of Ohio against Century
and certain of its current and former directors and officers. The plaintiffs in
this case made similar allegations for the time period from March 4, 1999 to
January 28, 2000.
There has been no discovery in any of the actions. Century and the named
director and officer defendants deny all allegations of wrongdoing made against
them in these actions and intend to vigorously defend each of these lawsuits.
Although the ultimate outcome of such litigation is uncertain, based on the
allegations contained in the complaints, management does not believe that these
lawsuits will have a material adverse effect on the financial condition, results
of operations or cash flows of Century.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Century's stockholders during the fourth
quarter of the fiscal year covered by this Annual Report.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of Century is quoted on the Nasdaq National Market under the
trading symbol "CBIZ". Prior to December 23, 1997, the Common Stock was quoted
under the trading symbol "IASI". The table below sets forth the range of high
and low sales prices for the Common Stock as reported on the Nasdaq National
Market for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter............................................... $15.13 $ 9.88
Second Quarter.............................................. 11.50 7.88
Third Quarter............................................... 11.75 7.88
Fourth Quarter ............................................. 17.38 8.75
1998
First Quarter............................................... $18.25 $13.94
Second Quarter.............................................. 20.19 16.38
Third Quarter............................................... 25.38 17.50
Fourth Quarter ............................................. 20.38 8.88
1999
First Quarter............................................... $15.25 $ 9.50
Second Quarter.............................................. 14.50 9.75
Third Quarter............................................... 16.13 10.25
Fourth Quarter.............................................. 12.75 8.00
</TABLE>
On December 31, 1999, the last reported sale price of Century's Common Stock as
reported on the Nasdaq National Market (Nasdaq Amex-Online) was $8.44 per share.
As of March 10, 2000, Century had 14,187 holders of its common stock.
DIVIDEND POLICY
Century has not paid cash dividends on its common stock since April 27, 1995,
and does not anticipate paying cash dividends in the foreseeable future.
Century's Board of Directors decides on the payment and level of dividends on
common stock. The board's decision is based on results of operations and
financial condition among other things. In addition, Century's credit facility
contains a requirement for lender consent prior to the declaration of any
dividends. Century currently intends to retain future earnings to finance the
ongoing operations and growth of the business. Any future determination as to
dividend policy will be made at the discretion of the Board of Directors and
will depend on a number of factors, including future earnings, capital
requirements, financial condition and future prospects, limitations on dividend
payments pursuant to credit or other agreements and such other factors as the
Board of Directors may deem relevant.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for Century and
is derived from the historical consolidated financial statements and notes
thereto, which are included elsewhere in this Annual Report of Century. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of Century and the notes thereto, which
are included elsewhere in this Annual Report. This information has been restated
for business combinations accounted for as poolings-of-interests as if such
combined companies had operated as one entity since inception.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $ 546,393 $ 359,468 $ 179,516 $ 110,035 $ 75,009
Expenses:
Operating (a) 461,118 282,674 155,600 99,203 65,933
Corporate general and administrative (a) 19,138 5,155 4,162 302 -
Merger-related 5,789 4,535 416 - -
Depreciation and amortization 23,470 11,074 4,128 1,529 1,174
Interest expense 6,602 3,241 1,216 47 217
Other expense (income), net (b) 4,397 (4,811) (2,289) - -
--------- ---------- ---------- --------- ------------
Total expenses 520,514 301,868 163,233 101,081 67,324
Income from continuing operations
before income tax expense 25,879 57,600 16,283 8,954 7,685
Income tax expense 14,449 20,590 4,224 688 716
--------- ---------- ---------- --------- ------------
Income from continuing operations 11,430 37,010 12,059 8,266 6,969
Income (loss) from discontinued business, (3,596) 6,880 7,992 4,350 3,469
net of tax
Loss on disposal of discontinued business, (391) - (572) - -
net of tax
--------- ---------- ---------- --------- ------------
Net income $ 7,443 $ 43,890 $ 19,479 $ 12,616 $ 10,438
========= ========== ========== ========= ============
Basic shares 86,851 67,880 49,448 30,371 27,268
========= ========== ========== ========= ============
Diluted shares 91,702 81,084 61,412 36,540 29,464
========= ========== ========== ========= ============
Earnings per share (from continuing operations):
Basic $ 0.13 $ 0.55 $ 0.24 $ 0.27 $ 0.26
========= ========== ========== ========= ============
Diluted $ 0.12 $ 0.46 $ 0.20 $ 0.23 $ 0.24
========= ========== ========== ========= ============
OTHER DATA:
Goodwill, net of accumulated amortization $ 379,922 $ 293,553 $ 89,236 $ 5,916 $ 28
Total assets $ 787,343 $ 579,764 $ 254,105 $ 145,784 $ 68,224
Total liabilities $ 274,211 $ 175,403 $ 92,689 $ 39,835 $ 34,885
Total stockholders' equity $ 513,132 $ 404,361 $ 161,416 $ 105,949 $ 33,339
</TABLE>
- - -----------------------
(a) Operating expenses and corporate general and administrative expenses
include $21 million and $6.4 million, respectively, of integration and
consolidation charges for the year ended December 31, 1999.
(b) Includes an $8.9 million reserve on notes receivable from a previously
classified discontinued operation for the year ended December 31, 1999.
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding of Century's
financial position and results of operations for each of the years ended
December 31, 1999, 1998 and 1997. This discussion should be read in conjunction
with Century's consolidated financial statements and notes thereto included
herein. During 1999, Century slowed its strategic acquisition program,
purchasing the businesses of thirty-five complementary companies. Thirty of
these acquisitions were accounted for under the purchase method of accounting,
and accordingly, the operating results of the acquired companies have been
included in Century's consolidated financial statements since their date of
acquisition. Five of these acquisitions were accounted for under the
pooling-of-interests method of accounting, and accordingly, all periods
presented have been restated to include the operating results of the acquired
companies. The results of operations related to Century's risk-bearing specialty
insurance services have been reflected as a discontinued operation in the
consolidated financial statements. See "Results of Operations - Discontinued
Operations."
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased to $546.4 million for the year ended December 31, 1999,
from $359.5 million for the comparable period in 1998, representing an increase
of $186.9 million, or 52.0%. The $186.9 million increase was primarily
attributable to (i) Century's acquisitions completed in 1999 and 1998 that were
accounted for under the purchase method of accounting, and (ii) internal growth.
Acquisitions completed in 1999 under the purchase accounting method, which are
included from the date of acquisition, accounted for $33.7 million of such
increase. Internal growth is based on the increase in revenues of companies that
have full periods of operations for both the years ended December 31, 1999 and
1998, including companies that are accounted for as poolings-of-interests.
EXPENSES
Total expenses increased to $520.5 million for the year ended December 31, 1999,
from $301.9 million for the comparable period in 1998, representing an increase
of $218.6 million, or 72.4%. Such increase was primarily attributable to (i) the
increase in operating expenses, (ii) the impact of Century's acquisitions made
in 1999 and 1998, (iii) $27.4 million of consolidation and integration charges
resulting from Century's recently announced consolidation initiatives in
December 1999, (iv) $8.9 million reserve taken for impairment of a note
receivable, and (v) $4.2 million of additional amortization expense for the
change in the goodwill amortization period to 15 years beginning October 1,
1999. As a percentage of total revenues, total expenses increased to 95.3% for
the year ended December 31, 1999, from 84.0% for the comparable period of 1998.
Excluding the consolidation and integration charges, the reserve for the note
receivable, and the effect of the change in goodwill amortization period, the
percentage of total expenses to total revenue for the year ended December 31,
1999 was 87.8%.
Century announced on December 28, 1999 that its Board of Directors had approved
a plan to consolidate several of its operations in multi-office markets and
integrate certain back-office functions into a shared-services center. The plan
includes 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 charge of $27.4 million, of which $21.0 million is
included in operating expense and $6.4 million is included in corporate general
and administrative expense in the consolidated statements of income. (See Note
14 Century's Consolidated Financial Statements.)
Operating expenses increased to $461.1 million for the year ended December 31,
1999, from $282.7 million for the comparable period in 1998, representing an
increase of $178.4 million, or 63.1%. Such increase was primarily attributable
to acquisitions completed in 1999 and 1998, and includes $21.0 million of
consolidation and integration charges, as discussed above. As a percentage of
total revenues, operating expenses increased to 84.4% for the year ended
December 31, 1999, from 78.6% for the comparable period in 1998. Excluding the
consolidation and integration charges, the percentage of operating expenses to
total revenue for the year ended December 31, 1999 was 80.5%.
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<PAGE> 18
Corporate general and administrative expenses increased to $19.1 million for the
year ended December 31, 1999, from $5.2 million for the comparable period in
1998, representing an increase of $13.9 million, or 271.3%. Such increase was
attributable to growth of the corporate office needed to support Century's
infrastructure, corporate initiatives, and integration and consolidation costs,
including $6.4 million of consolidation and integration charges as discussed
above. Corporate general and administrative expenses represented 3.5% of total
revenues for the year ended December 31, 1999, compared to 1.4% for the
comparable period in 1998. Excluding the consolidation and integration charges
in the fourth quarter, the percentage of corporate general and administrative
expenses represented 2.3% of total revenue for the year ended December 31, 1999.
Merger-related expenses increased to $5.8 million for the year ended December
31, 1999, from $4.5 million for the comparable period in 1998, representing an
increase of $1.3 million, or 27.7%. Such increase was attributable primarily to
transaction costs related to acquisitions completed in 1999, and the build out
of the mergers and acquisitions department throughout 1998, resulting in the
full utilization of the department in 1999. Included in merger-related expenses
are fees on two significant pooling transactions completed in the third quarter
of 1999. The shareholders of one of the pooled transactions paid a $1.0 million
investment-banking fee, which was reflected on Century's income statement in the
third quarter and for the year ended December 31, 1999. Merger-related expenses
are comprised primarily of professional fees incurred in transactions accounted
for as pooling-of-interests and the salaries of employees dedicated to merger
activities. Merger-related expenses increased through the first three quarters
of 1999, but decreased during the fourth quarter of 1999 due to Century's
decision to slow the acquisition program and scale down the mergers and
acquisitions department.
Depreciation and amortization expense increased to $23.5 million for the year
ended December 31, 1999, from $11.1 million for the comparable period in 1998,
representing an increase of $12.4 million, or 111.9%. The increase is a result
of the increase of goodwill amortization and depreciation expense resulting from
the 30 acquisitions completed by Century in 1999, and the 48 acquisitions
completed in 1998, which were accounted for under the purchase method of
accounting, as well as the change in the goodwill amortization period to 15
years beginning October 1, 1999. The change in the goodwill amortization
resulted in approximately $4.2 million in additional goodwill amortization
expense in the fourth quarter and for the year ended December 31. 1999. As a
percentage of total revenues, depreciation and amortization expense increased to
4.3% for the year ended December 31, 1999 from 3.1% for the comparable period in
1998. Excluding the effect of the change in the goodwill amortization period,
depreciation and amortization expense increased to 3.5% of total revenues for
the year ended December 31, 1999.
Interest expense was $6.6 million for the year ended December 31, 1999, as
compared to interest expense of $3.2 million for the comparable period in 1998.
Such fluctuation was due primarily to higher debt carried in 1999 from Century's
revolving credit facility as well as debt acquired in connection with 1999
acquisitions.
Other expense, net was $4.4 million for the year ended December 31, 1999, as
compared to other income, net of $4.8 million for the comparable period in 1998,
representing a change of approximately $9.2 million, or 191.7%. In 1999, other
expense of $8.9 million was incurred due to the impairment of notes received in
connection with a transaction accounted for a discontinued operation in 1997,
offset by interest income and other income of $4.5 million. In 1998, other
income, net was primarily attributable to the $1.5 million gain on the sale of
M&N Risk Management, Inc. and M&N Enterprises, Inc. and interest income of $3.4
million.
Century recorded income taxes from continuing operations of $14.4 million ($16.2
million on a pro forma basis) for the year ended December 31, 1999 and $20.6
million ($22.4 million on a pro forma basis) for the comparable period in 1998.
The effective income tax rate from continuing operations increased to 55.8%
(62.6% on a pro forma basis) from 35.7% (38.8% on a pro forma basis) for the
comparable period in 1998. Such increase in the effective tax rate was primarily
attributable to the increase in goodwill amortization expense (which is
primarily non-deductible), the write-down of four non-core business units to net
realizable value, and the non-deductible investment banking fee paid in the
third quarter.
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<PAGE> 19
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased to $359.5 million for the year ended December 31, 1998,
from $179.5 million for the comparable period in 1997, representing an increase
of $180.0 million, or 100.2%. The $180.0 million increase was primarily
attributable to (i) Century's acquisitions completed in 1998 and 1997 that were
accounted for under the purchase method of accounting, and (ii) internal growth.
Internal growth is based on the increase in revenues of companies that have full
periods of operations for both the years ended December 31, 1998 and 1997,
including companies that are accounted for as poolings-of-interests.
EXPENSES
Total expenses increased to $301.9 million for the year ended December 31, 1998,
from $163.2 million for the comparable period in 1997, representing an increase
of $138.7 million, or 84.9%. Such increase was primarily attributable to the
increase in operating expenses, which reflects the impact of Century's
acquisitions made in 1998 and the corresponding increase of corporate staff and
related integration costs. As a percentage of total revenues, total expenses
decreased to 84.0% for the year ended December 31, 1998, from 90.9% for the
comparable period of 1997.
Operating expenses increased to $282.7 million for the year ended December 31,
1998, from $155.6 million for the comparable period in 1997, representing an
increase of $127.1 million, or 81.7%. Such increase was primarily attributable
to acquisitions completed in 1998. As a percentage of total revenues, operating
expenses decreased to 78.6% for the year ended December 31, 1998, from 86.7% for
the comparable period in 1997. This decrease was attributable to cost savings
achieved through integration and consolidation of earlier acquisitions,
partially offset by the initial integration costs incurred by the newly acquired
subsidiaries.
Corporate general and administrative expenses increased to $5.2 million for the
year ended December 31, 1998, from $4.2 million for the comparable period in
1997, representing an increase of $1.0 million, or 23.9%. Such increase was
primarily attributable to growth of the corporate office needed to support
Century's infrastructure, corporate initiatives, and integration efforts.
Corporate general and administrative expenses represented 1.4% of total revenues
for the year ended December 31, 1998, compared to 2.3% for the comparable period
in 1997.
Merger-related expenses increased to $4.5 million for the year ended December
31, 1998, from $0.4 million for the comparable period in 1997, primarily due to
the higher volume of acquisitions in 1998. Merger and acquisition costs are
comprised primarily of salaries of employees dedicated to merger activities and
professional fees incurred in transactions accounted for as
pooling-of-interests.
Depreciation and amortization expense increased to $11.1 million for the year
ended December 31, 1998, from $4.1 million for the comparable period in 1997,
representing an increase of $7.0 million, or 168.3%. The increase is a result of
the increase of goodwill amortization and depreciation expense resulting from
the 48 acquisitions completed by Century in 1998, as well as 38 acquisitions in
1997, accounted for under the purchase method of accounting. As a percentage of
total revenues, depreciation and amortization expense increased to 3.1% for the
year ended December 31, 1998, from 2.3% for the comparable period in 1997.
Interest expense increased to $3.2 million for the year ended December 31, 1998,
from $1.2 million for the comparable period in 1997, representing an increase of
$2.0 million, or 166.7%. Such increase was attributable to higher debt carried
in 1998 from Century's revolving credit facility and debt acquired in connection
with 1998 acquisitions.
In 1998, other income, was primarily attributable to the $1.5 million gain on
the sale of M&N Risk Management, Inc. and M&N Enterprises, Inc. and interest
income of approximately $3.4 million.
19
<PAGE> 20
Century recorded income taxes from continuing operations of $20.6 million ($22.4
million on a pro forma basis) for the year ended December 31, 1998 and $4.2
million ($5.9 million on a pro forma basis) for the comparable period in 1997.
The effective income tax rate from continuing operations increased to 35.7%
(38.8% on a pro forma basis) for the year ended December 31, 1998 from 25.9%
(36.4% on a pro forma basis) for the comparable period in 1997. Such increase in
the effective income tax rate was primarily attributable to the increase in
goodwill amortization expense (which is primarily non-deductible).
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
In April 1999, Century's Board of Directors determined that the risk-bearing
specialty insurance segment of Century, which includes Century Surety Company,
Continental Heritage Insurance Company and Evergreen National Indemnity (The CSC
Group), was no longer part of Century's strategic long-term growth objectives.
As a result, the Board of Directors began the process of examining available
alternatives, including the sale of the division in whole or part, the spin-off
of the division to stockholders, or other similar transactions. The loss on
disposal of discontinued business for the year ended December 31, 1999
represents the Company's adjustment to the net realizable value based on
negotiations with a third party. The loss on disposal of discontinued business
for the year ended December 31, 1997 related to the Company's previously
disposed of hazardous waste company.
COMBINED AND OPERATING RATIOS
The combined ratio is the sum of the loss ratio and expense ratio and is the
traditional measure of underwriting performance for insurance companies. The
operating ratio is the combined ratio less the net investment income ratio (net
investment income to net earned premium) excluding realized and unrealized
capital gains and is used to measure overall company performance.
The following table reflects the loss, loss expense (LAE), expense, combined,
net investment and operating ratios of Century on a generally accepted
accounting principles (GAAP) basis for each of the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Loss ratio.................................................... 48.1% 36.2% 34.3%
LAE ratio..................................................... 17.4 16.6 21.2
Expense ratio................................................. 51.3 45.4 32.2
---- ---- ----
Combined ratio................................................ 116.8 98.2 87.7
Net investment ratio.......................................... (11.6) (12.0) (12.2)
Operating ratio............................................... 105.2 86.2 75.5
</TABLE>
EXPENSES
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net written premiums on a GAAP basis. The statutory ratio
differs from the GAAP ratio as a result of different treatment of acquisition
costs. Expense ratios have been unfavorably impacted by reinsurance
contingencies in 1999, and have been favorably impacted by reinsurance
contingencies in 1998 and 1997.
LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLE
As of December 31, 1999, the liability for losses and LAE constituted 31% of
Century's consolidated liabilities. Century has established reserves that
reflect its estimates of the total losses and LAE it will ultimately be required
to pay under insurance and reinsurance policies. Such reserves include losses
that have been reported but not settled and losses that have been incurred but
not reported (IBNR). Loss reserves are established on an undiscounted basis
after reductions for deductibles and estimates of salvage and subrogation.
20
<PAGE> 21
For reported losses, Century establishes reserves on a "case" basis within the
parameters of coverage provided in the related policy. For IBNR losses, Century
estimates reserves using established actuarial methods. Case and IBNR loss
reserve estimates reflect such variables as past loss experience, social trends
in damage awards, changes in judicial interpretation of legal liability and
policy coverages, and inflation. Century takes into account not only monetary
increases in the cost of what is insured, but also changes in societal factors
that influence jury verdicts and case law and, in turn, claim costs. Century's
loss reserves have been certified in accordance with the requirements of the
National Association of Insurance Commissioners.
The consolidated financial statements of Century include the estimated liability
for unpaid losses and LAE of Century's insurance operations. Reserves for unpaid
losses covered by insurance policies and bonds consist of reported losses and
IBNR losses. These reserves are determined by claims personnel and the use of
actuarial and statistical procedures and they represent undiscounted estimates
of the ultimate cost of all unpaid losses and LAE through year-end. Although
management uses many resources to calculate reserves, a degree of uncertainty is
inherent in all such estimates. Therefore, no precise method for determining
ultimate losses and LAE exists. These estimates are subject to the effect of
future claims settlement trends and are continually reviewed and adjusted (if
necessary) as experience develops and new information becomes known. Any such
adjustments are reflected in current operations.
21
<PAGE> 22
ANALYSIS OF LOSS AND LAE DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for losses and
loss expenses............. $8,168 10,428 12,775 14,107 21,023 25,278 28,088 32,985 42,399 44,556 49,556
Cumulative amount of net liability paid through:
One year later......... 2,404 2,404 2,811 3,026 4,131 6,309 8,785 8,773 13,639 14,872
Two years later........ 3,433 4,090 4,894 3,848 7,503 11,161 14,452 16,798 23,049
Three years later...... 4,322 5,239 5,372 4,786 9,346 13,910 18,874 21,137
Four years later....... 4,984 5,184 6,010 5,119 10,594 15,745 21,069
Five years later....... 4,880 5,352 6,102 5,572 11,415 17,071
Six years later........ 4,953 5,352 6,217 5,586 12,130
Seven years later...... 4,947 5,391 6,229 5,689
Eight years later...... 4,969 5,403 6,268
Nine years later....... 4,971 5,431
Ten years later........ 4,990
The retroactively
reestimated net
liability for
loss and loss
expenses as of:
One year later......... 8,388 10,674 12,003 12,587 18,910 23,049 28,246 31,803 39,369 46,574
Two years later........ 8,504 9,239 10,877 9,829 17,531 22,193 27,033 28,983 40,636
Three years later...... 7,025 8,183 8,419 8,899 16,174 20,660 24,608 29,487
Four years later....... 6,668 6,631 8,675 7,822 14,775 19,046 24,477
Five years later....... 5,638 6,320 7,467 6,766 13,099 18,871
Six years later........ 5,243 5,823 6,704 5,973 12,908
Seven years later...... 5,133 5,557 6,352 5,892
Eight years later...... 4,992 5,450 6,329
Nine years later....... 4,982 5,446
Ten years later........ 4,996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net cumulative redundancy. $3,172 4,982 6,446 8,215 8,115 6,407 3,611 3,498 1,763 (2,018)
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Gross liability - end of
year...................... $34,661 $37,002 $41,099 $50,655 $60,994 $84,520
Reinsurance recoverable... 9,383 8,914 8,114 8,256 16,438 34,964
------- ------- ------- ------- ------- -------
Net liability - end of
year...................... $25,278 $28,088 $32,985 $42,399 $44,556 $49,556
======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
Cash and cash equivalents increased $5.3 million to $48.9 million at December
31, 1999, from $43.6 million at December 31, 1998, as cash provided by financing
activities of $98.2 million exceeded cash used in operating activities of $17.6
million and cash used in investing activities of $75.3 million. Cash and cash
equivalents increased $20.1 million to $43.6 million at December 31, 1998, from
$23.5 million at December 31, 1997, as cash provided by operating activities of
$16.9 million and cash provided by financing activities of $83.6 million
exceeded cash used in investing activities of $80.4 million.
Cash used in investing activities consisted primarily of cash used in business
acquisitions and purchases of fixed assets. Significant purchases of fixed
assets in 1999 were 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.
22
<PAGE> 23
Cash provided by financing activities in 1999 consisted primarily of proceeds of
$43.8 million from stock issuances and exercise of stock options and warrants,
proceeds from the revolving credit facility (net of repayments) of $100.0
million, and payments on notes payable and capital leases (net of proceeds) of
$43.0 million. Cash provided by financing activities in 1998 consisted primarily
of proceeds of $83.8 million from stock issuances and exercise of stock options
and warrants, proceeds from the revolving credit facility (net of repayments) of
$35.6 million, and payments on notes payable and capital leases (net of
proceeds) of $33.1 million.
During 1997, Century realized approximately $8.4 million in cash proceeds from
the revolving credit facility (net of repayments) and $8.4 million from stock
issuances and a net use of $11.1 million from other financing sources. These
proceeds were primarily used to fund its acquisition program as well as to fund
the investment activities of Century's specialty insurance subsidiaries, offset
by Century's disposition of its environmental systems operations.
SOURCES OF CASH
Century's principal source of revenue from its business outsourcing services
operation is 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 administration and insurance services, human
resources and payroll services, performance consulting services, and technology
solutions.
Century's principal source of revenue from its specialty insurance services
operations consists of insurance and reinsurance premiums, investment income,
commission and fee income, and proceeds from sales and maturities of investment
securities. Premiums written become premiums earned for financial statement
purposes as the premium is earned incrementally over the term of each insurance
policy and after deducting the amount of premium ceded to reinsurers pursuant to
reinsurance treaties or agreements. The property and liability operation of
Century generates positive cash flow from operations as a result of premiums
being received in advance of the time when the claim payments are made.
The companies of the CSC Group are subject to regulation and supervision by
state insurance regulatory agencies, applicable generally to each insurance
company in its state of incorporation. Such regulations limit the amount of
dividends or distributions by an insurance company to its shareholders. If
insurance regulators determine that payment of a dividend or any other payment
to an affiliate (such as a payment under a tax allocation agreement) would,
because of the financial condition of the paying insurance company or otherwise,
be detrimental to such insurance company's policyholders or creditors, the
regulators may block payment of such dividend or such other payment to the
affiliates that would otherwise be permitted without prior approval.
Ohio law limits the payment of dividends by an insurance subsidiary to its
parent. The maximum dividend that may be paid without prior approval of the
Director of Insurance of the State of Ohio is limited to the greater of the
statutory net income of the preceding calendar year or 10% of total statutory
shareholder's equity as of the prior December 31. At December 31, 1999, the
maximum dividend that may be paid by Century's regulated insurance subsidiaries
to Century without prior approval of the Director of Insurance of the State of
Ohio was $4.9 million. In addition, under Century's current credit facility,
Century cannot pay cash dividends without the prior written consent of the
lender.
Century's primary line of credit is a $250 million revolving credit facility
with several financial institutions, of which approximately $144,000,000 was
outstanding at December 31, 1999. (See Notes 5 and 13 to Century's consolidated
financial statements included herewith.)
23
<PAGE> 24
USES OF CASH AND LIQUIDITY OUTLOOK
Century's capital expenditures from continuing operations totaled $33.7 million,
$13.2 million and $3.9 million for the years ended December 31, 1999, 1998 and
1997, respectively, which included expenditures for fixed assets for normal
replacement, compliance with regulations and market development. During the year
ended December 31, 1999, Century primarily funded capital expenditures from
operating cash flow and financing activities. Century anticipates that during
2000, it will continue to fund expenditures from operating cash flow
supplemented by borrowings under its revolving credit facility, as necessary.
Management believes that Century currently has sufficient cash and lines of
credit to fund current operations.
Century's discontinued operations are required to establish a reserve for
unearned premiums. Century's principal costs and factors in determining the
level of profit is the difference between premiums earned and losses, LAE and
agent commissions. Loss and LAE reserves are estimates of what an insurer
expects to pay on behalf of claimants. Century is required to maintain reserves
for payment of estimated losses and LAE for both reported claims and for IBNR
claims. Although the ultimate liability incurred by Century may be different
from current reserve estimates, management believes that the reserves are
adequate.
YEAR 2000 COMPLIANCE PROJECT
Century completed its Y2K compliance project and incurred no unanticipated
expenditures or disruption of services as a result of Y2K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
QUANTITATIVE INFORMATION ABOUT MARKET RISK. Century's exposure to market risk,
including interest rate risk, is not significant. If market interest rates were
to increase or decrease immediately and uniformly by 100 basis points from
levels at December 31, 1999, in each case the impact on Century's financial
condition and results of operations would not be significant. Century does not
engage in trading market risk sensitive instruments. Neither does Century
purchase as investments, hedges or for purposes "other than trading" instruments
that are likely to expose Century to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. Century has not issued
debt instruments, entered into forward or futures contracts, purchased options
or entered into swaps.
QUALITATIVE INFORMATION ABOUT MARKET RISK. Century'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 Century could borrow funds under its credit facility.
Century's strategy to manage this exposure is to keep its borrowings to a
minimum.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are included
in this Annual Report as set forth in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
24
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of Directors" in Century's
definitive proxy statement relating to the 2000 Annual Stockholders Meeting is
incorporated herein by reference.
The following table sets forth certain information regarding the directors,
executive officers and certain key employees of Century. Each executive officer
of Century named in the following table has been elected to serve until his
successor is duly appointed or elected or until his earlier removal or
resignation from office. No arrangement or understanding exists between any
executive officer of Century and any other person pursuant to which he or she
was selected as an officer.
<TABLE>
<CAPTION>
NAME AGE POSITION (S)
------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Michael G. DeGroote(3)............................ 66 Chief Executive Officer and Chairman of the Board
Jerome P. Grisko, Jr. (3)......................... 38 President
Charles D. Hamm, Jr. (3).......................... 45 Senior Vice President and Chief Financial Officer
Douglas R. Gowland................................ 58 Senior Vice President, Corporate Services
Bradley P. Newman................................. 43 Senior Vice President, Business Solutions
Robert A. O'Byrne................................. 43 Senior Vice President, President of the Benefits
Administration & Insurance Services Group
John J. Hopkins................................... 46 Senior Vice President, Business Development and Marketing
Rick L. Burdick (1)............................... 48 Director
Joseph S. DiMartino............................... 56 Director
Harve A. Ferrill (1)(2)........................... 67 Director
Hugh P. Lowenstein (2)............................ 69 Director
Richard C. Rochon (1)(2).......................... 42 Director
OTHER KEY EMPLOYEES:
Teresa E. Bruce................................... 35 Vice President
Daniel J. Clark................................... 45 Vice President
Eldon G. Walter................................... 53 Vice President
Barbara A. Rutigliano............................. 48 Corporate Secretary
</TABLE>
- - ---------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Management Executive Committee
25
<PAGE> 26
EXECUTIVE OFFICERS AND DIRECTORS:
MICHAEL G. DEGROOTE has served as the Chairman of the Board of Century since
April 1995. Mr. DeGroote also served as Chief Executive Officer and President of
Century from April 1995 until October 1996 and from November 1997 to April 1999.
Since April 1999 Mr. DeGroote has served as CEO. Mr. DeGroote served as Chairman
of the Board, President and Chief Executive Officer of Republic Industries,
Inc., now known as AutoNation, Inc., from May 1991 to August 1995. Mr. DeGroote
founded Laidlaw Inc., a Canadian waste services and transportation company in
1959. In 1988, Mr. DeGroote sold his controlling interest in Laidlaw to Canadian
Pacific Limited. Mr. DeGroote served as President and Chief Executive Officer of
Laidlaw from 1959 until 1990. Mr. DeGroote currently serves on the Board of
Directors of AutoNation, Inc.
JEROME P. GRISKO, JR. has been in the position of President of Century since
February 1, 2000, Mr. Grisko joined Century as Vice President, Mergers &
Acquisitions in September 1998 and was promoted to Senior Vice President,
Mergers & Acquisitions and Legal Affairs in December of that year. Prior to
joining Century, Mr. Grisko was associated with the law firm of Baker &
Hostetler LLP, where he practiced from September 1987 until September 1998,
serving as a partner of such firm from January 1995 to September 1998. While at
Baker & Hostetler, Mr. Grisko concentrated his practice in the area of mergers,
acquisitions and divestitures. Mr. Grisko is a member of the American, Ohio and
Cleveland Bar Associations.
CHARLES D. HAMM, JR. has served as Senior Vice President and Chief Financial
Officer since December 1998. Previously, Mr. Hamm was Chief Financial Officer
and Treasurer since November 1997. Mr. Hamm was associated with KPMG LLP, an
international accounting firm, from June 1984 until November 1997, serving as a
partner of such firm from July 1996 until November 1997. Mr. Hamm is a CPA and a
member of the American Institute of Certified Public Accountants and the Ohio
Society of Certified Public Accountants.
DOUGLAS R. GOWLAND has served as a Senior Vice President since November 1997.
Mr. Gowland served as a Director of Century from April 1995 through November
1997. From April 1995 until October 1996, Mr. Gowland served as Century's
Executive Vice President and Chief Operating Officer. From January 1992 to April
1995, Mr. Gowland served as Vice President - Hazardous Waste Operations of
Republic Industries, Inc., the predecessor of AutoNation, Inc. From March 1991
to January 1992, Mr. Gowland served as Vice President of DRG Environmental
Management, Inc. Prior thereto, he served as President of Great Lakes
Environmental Systems, Ltd.
JOHN J. HOPKINS has served as Senior Vice President, in charge of Business
Development & Marketing of Century since December 1998. He served as Vice
President, Business Development from July 1998 through November 1998. Prior to
joining Century, Mr. Hopkins was associated with a personal investment and
insurance firm from October 1995 to December 1997, and in his final year, as
Acting Chief Operating Officer. From July 1976 to October 1995, Mr. Hopkins was
associated with Coopers & Lybrand LLP, where he served as a partner from October
1985 until October 1995. During his tenure as a partner, he served as Regional
Partner of Real Estate Advisory Services, Regional Partner of Asset Management
Services, and National Director of Tax Process Management/Outsourcing. Mr.
Hopkins serves on the Board of Advisors of Drexel University College of Business
Administration. He is a CPA with a Masters in Taxation, and a member of the
American Institute of Certified Public Accountants and the Pennsylvania
Institute of Certified Public Accountants.
BRADLEY P. NEWMAN was named Senior Vice President of Century and President of
the Accounting, Tax, Valuation and Advisory Group in November 1999. Mr. Newman
joined Century in January 1997, serving most recently as Vice President for the
Benefits and Insurance Services Group. Prior to joining Century, Mr. Newman was
employed by Republic Western Insurance Company (RWIC) for fifteen years. From
1989 to 1996, he served as RWIC's Chief Financial Officer.
ROBERT A. O'BYRNE was named a Senior Vice President of Century in December 1998
in charge of the Benefits Administration & Insurance Services Group. Mr. O'Byrne
served as Chairman of the Board and CEO of Robert D. O'Byrne and Associates,
Inc., an employee benefits brokerage/consulting firm prior to its acquisition by
Century in December 1997. Mr. O'Byrne remains President CBIZ Benefits and
Insurance Services, Inc.
26
<PAGE> 27
RICK L. BURDICK has served as a Director of Century since November 1997, when he
was elected as an outside director. Mr. Burdick has been a partner at the law
firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. since April 1988. Mr. Burdick
serves on the Board of Directors of AutoNation, Inc.
JOSEPH S. DIMARTINO has served as a Director of Century since November 1997,
when he was elected as an outside director. Mr. DiMartino has been Chairman of
the Board of the Dreyfus Family of Funds since January 1995. Mr. DiMartino
served as President, Chief Operating Officer and Director of The Dreyfus
Corporation from October 1982 until December 1994 and was also a director of
Mellon Bank Corporation. Mr. DiMartino also serves on the Board of Directors of
Quikcat.com; Health Plan Services Corporation; Carlyle Industries, Inc.; and the
Muscular Dystrophy Association.
HARVE A. FERRILL has served as a Director of Century since October 1996, when he
was elected as an outside director. Mr. Ferrill has served as Chief Executive
Officer of Advance Ross Corporation, a company that provides tax refunding
services ("ARC"), since 1991. Mr. Ferrill served as President of ARC from 1990
to 1993 and as Chairman of the Board from 1992 to 1996. Since 1996, ARC is a
wholly-owned subsidiary of Cendant Corporation. Mr. Ferrill has served as
President of Ferrill-Plauche Co., Inc., a private investment company, since
1982. Mr. Ferrill also serves on the Board of Directors of Gaylord Container
Corporation.
HUGH P. LOWENSTEIN has served as a Director of Century since March 1997, when he
was elected as an outside director. Mr. Lowenstein has served as the Founder and
Chief Executive Officer of Shore Capital Ltd. (Bermuda), a consulting and
investment advisory firm, since 1994. Mr. Lowenstein served as a Managing
Director of Donaldson, Lufkin and Jenrette Securities Corporation from 1987 to
1994. Mr. Lowenstein also served on the Board of Directors of Terra Nova
(Bermuda) Holdings Ltd. (through March 2000).
RICHARD C. ROCHON has served as a Director of Century since October 1996, when
he was elected as an outside director. Mr. Rochon has served since 1988 as
President of Huizenga Holdings, Inc., a management and holding company for
diversified investments in operating companies, joint ventures and real estate,
on behalf of its owner, Mr. H. Wayne Huizenga. Mr. Rochon also has served as a
director since September 1996 and as Vice Chairman of Boca Resorts, Inc., the
owner and operator of luxury resort properties, since April 1997. From 1985
until 1988, Mr. Rochon served as Treasurer of Huizenga Holdings, Inc. and from
1979 until 1985, he was employed as a certified public accountant by the
international public accounting firm of Coopers & Lybrand, L.L.P.
OTHER KEY EMPLOYEES:
TERESA E. BRUCE was named Vice President of Human Resources in January 1999. Ms.
Bruce served as Director of Human Resources for Robert D. O'Byrne & Associates,
Inc. and The Grant Nelson Group, Inc., subsidiaries of Century now known as CBIZ
Benefits and Insurance Services, Inc., for four years prior to accepting her
current position. Ms. Bruce has over 13 years of experience in human resources
and is an active member of the Greater Kansas City Chapter of The Human
Resources Management Association and Society of Human Resources Management.
DANIEL J. CLARK was named Vice President in November 1997 and is the Senior Vice
President of Evergreen National Indemnity Company and a director of Century
Surety Company, both subsidiaries of Century. Prior to joining Evergreen, Mr.
Clark served as Chief of Staff for then Congressman Edward F. Feighan from 1983
through 1993. Mr. Clark is a member of the Ohio Bar Association and serves as
Vice Chairman for the Port of Cleveland.
ELDON G. WALTER was named President of Accounting, Tax and Valuation Services in
February 2000 and has been a Vice President since February 1999. Mr. Walter
served as Chairman and President of Mayer Hoffman McCann, L.C. a predecessor of
MHM Business Services, Inc. from 1988 through the acquisition by Century in
September 1998. Mr. Walter now serves as President of MHM Business Services,
Inc. Mr. Walter has over 30 years of experience in all aspects of taxation, and
he is affiliated with the American Institute of Certified Public Accountants,
the Missouri Society of Certified Public Accountants and the Kansas City Estate
Planning Association.
BARBARA A. RUTIGLIANO was named Corporate Secretary in December 1997. Ms.
Rutigliano was Senior Counsel and Corporate Secretary of BP America Inc. from
1989 until 1997 and was associated with the law firm of Squire, Sanders &
Dempsey from 1983 to 1989. Ms. Rutigliano is a member of the Ohio Bar, the
American Bar Association and the American Society of Corporate Secretaries.
27
<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item is incorporated by reference to Century's
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than 120 days after the end of Century's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference to Century's
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than 120 days after the end of Century's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain agreements and transactions between or
among Century and certain related parties. It is Century's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
Century's experience and the terms of its transactions with unaffiliated
parties, it is the Board of Directors' belief that the transactions described
below met these standards at the time of the transactions.
The office building utilized by SMR & Co. Business Services (a subsidiary of
Century) is leased under a ten-year lease, expiring February 26, 2006, from a
partnership in which former Senior Vice President's spouse is a one-third owner.
The lease provides for rental payments of $557,700 per year. A number of the
businesses acquired since October 1996 are located in properties owned
indirectly by and leased from persons employed by Century. In the aggregate, in
1999, Century paid approximately $2.1 million under such leases, which were at
competitive market rates.
Rick L. Burdick, a director of Century, is a partner of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. Akin, Gump performed substantial legal work for Century
during 1999 for which the firm received $458,742 from Century.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements.
As to financial statements and supplementary information,
reference is made to "Index to Financial Statements" on
page F-1 of this Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to
"Index to Financial Statements" on page F-1 of this Annual
Report.
3. Exhibits.
The following documents are filed as exhibits to this Form
10-K pursuant to Item 601 of Regulation S-K.
28
<PAGE> 29
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Century
(filed as Exhibit 3.1 to Century's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2 Certificate of Amendment of the Certificate of Incorporation
of Century dated October 18, 1996 (filed as Exhibit 3.2 to
Century's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
3.3 Certificate of Amendment of the Certificate of Incorporation
of Century effective December 23, 1997 (filed as Exhibit 3.3
to Century's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference).
3.4 Certificate of Amendment of the Certificate of Incorporation
of Century dated September 10, 1998 (filed as Exhibit 3.4 to
Century's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference).
3.5 Amended and Restated Bylaws of Century (filed as Exhibit 3.2
to Century's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference).
4.1 Form of Stock Certificate of Common Stock of Century (filed
as Exhibit 4.1 to Century's Annual Report Form 10-K for the
year ended December 31, 1998, and incorporated herein by
reference).
10.1 Amended and restated Credit Agreement dated, as of October
3, 1997, and as Amended and Restated as of August 10, 1998
and August 24, 1999 by and among Century and Bank of
America, N.A. as Agent and Letter of Credit Issuing Bank and
Swing Line Bank and Other Financial Institutions (filed as
Exhibit 99.9 to Century's Report on Form 10-Q for the period
ended September 30, 1999, and incorporated herein by
reference).
10.2* First Amendment to Amended and Restated Credit Agreement,
dated March 24, 2000, by and among Century and the Lenders
party to the Credit Agreement.
10.3 Form of Warrant to purchase 900,000 shares of Century's
common stock issued to Jackson National Life Insurance
Company (filed as Exhibit 10.2 to Century's Annual Report
Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference).
10.4 1996 Employee Stock Option Plan (filed as Appendix I to
Century's Proxy Statement 1997 Annual Meeting of
Stockholders dated April 1, 1997 and incorporated herein by
reference).
10.5 Amendment to the 1996 Employee Stock Option Plan (filed as
Exhibit 99.2 to Century's Current Report on Form 8-K dated
December 14, 1998, and filed January 12, 1999 and
incorporated herein by reference).
10.6 Agents 1997 Stock Option Plan (filed as Appendix II to
Century's Proxy Statement 1997 Annual Meeting of
Stockholders dated April 1, 1997 and incorporated herein by
reference).
21.1* List of Subsidiaries of Century Business Services, Inc.
23* Consent of KPMG LLP
24* Powers of attorney (included on the signature page hereto).
27* Financial data schedule
*Indicates documents filed herewith.
(b) Reports on Form 8-K
Century Business Services, Inc. filed the following Current Reports on Form 8-K
during the three months ended December 31, 1999:
Current Report on Form 8-K filed October 7, 1999.
Current Report on Form 8-K filed December 29, 1999.
Current Report on Form 8-K filed December 30, 1999.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Century has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTURY BUSINESS SERVICES, INC.
(Registrant)
By: /s/ Charles D. Hamm, Jr.
----------------------------------------
Charles D. Hamm, Jr.
Chief Financial Officer
March 30, 2000
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below on
this Annual Report hereby constitutes and appoints Michael G. DeGroote and
Jerome P. Grisko, Jr., and each of them, with full power to act without the
other, his true and lawful attorney-in-fact and agent, with full power of
substitution for him and his name, place and stead, in all capacities (until
revoked in writing), to sign any and all amendments to this Annual Report of
Century Business Services, Inc. and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that each attorney-in-fact and agent, or their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report has been signed below by the following persons on behalf of
Century Business Services, Inc. and in the capacities and on the date indicated
above.
/s/ Michael G. DeGroote /s/ Joseph S. DiMartino
- - ------------------------------- ---------------------------
Michael G. DeGroote Joseph S. DiMartino
Chief Executive Officer and Director
Chairman of the Board
/s/ Charles D. Hamm, Jr. /s/ Harve A. Ferrill
- - ------------------------------- ---------------------------
Charles D. Hamm, Jr. Harve A. Ferrill
Chief Financial Officer Director
(Principal Financial and Accounting Officer)
/s/ Rick L. Burdick /s/ Hugh P. Lowenstein
- - ------------------------------- ---------------------------
Rick L. Burdick Hugh P. Lowenstein
Director Director
/s/ Richard C. Rochon
---------------------------
Richard C. Rochon
Director
30
<PAGE> 31
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES ----
<S> <C>
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998........................................................ F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.................................................. F-6
Notes to the Consolidated Financial Statements...................................... F-7
Schedule I - Summary of Investments - Other than Investments in Related
Parties as of December 31, 1999................................................... F-31
Schedule III - Supplementary Insurance Information for the years ended
December 31, 1999, 1998 and 1997.................................................. F-32
Schedule IV - Reinsurance for the years ended
December 31, 1999, 1998 and 1997.................................................. F-33
</TABLE>
F-1
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CENTURY BUSINESS SERVICES, INC.:
We have audited the consolidated financial statements of Century Business
Services, Inc. and Subsidiaries as listed in the accompanying index on page F-1.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index on page F-1. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Century Business
Services, Inc. and Subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Cleveland, Ohio
February 29, 2000, except for paragraph 2 of note 13, which is as
of March 24, 2000
F-2
<PAGE> 33
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,906 $ 43,593
Restricted cash 17,246 -
Accounts receivable, less allowance for doubtful
accounts of $13,272 and $5,378 188,359 127,923
Notes receivable - current portion 3,209 15,563
Income taxes recoverable 14,835 -
Deferred tax asset 9,912 2,295
Other current assets 13,001 9,235
Net assets of discontinued operations 36,813 45,883
------------- --------------
Total current assets 332,281 244,492
Goodwill, net of accumulated amortization of
$18,527 and $5,838 379,922 293,553
Property and equipment, net of accumulated depreciation of
$21,792 and $14,490 56,148 29,207
Notes receivable - non-current portion 4,856 3,116
Other assets 14,136 9,396
------------- --------------
TOTAL ASSETS $ 787,343 $ 579,764
============= ==============
LIABILITIES
Current liabilities:
Accounts payable $ 41,228 $ 38,863
Income taxes payable - 5,967
Notes payable and capitalized leases - current portion 6,534 35,230
Accrued expenses 50,833 37,129
------------- --------------
Total current liabilities 98,595 117,189
Bank debt 144,000 44,000
Notes payable and capitalized leases - long term portion 1,345 6,741
Deferred tax liability 11,968 6,881
Accrued expenses 18,303 592
------------- --------------
TOTAL LIABILITIES 274,211 175,403
------------- --------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized - 250,000 shares
Issued and outstanding - 93,341 shares at December 31, 1999;
79,560 shares at December 31, 1998 933 795
Additional paid-in capital 443,052 336,743
Retained earnings 74,170 69,327
Unearned ESOP (1,795) (2,549)
Treasury stock (754) (74)
Accumulated other comprehensive income (loss) (2,474) 119
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 513,132 404,361
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 787,343 $ 579,764
============= ==============
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-3
<PAGE> 34
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Revenues $ 546,393 $ 359,468 $ 179,516
Expenses:
Operating 461,118 282,674 155,600
Corporate, general and administrative 19,138 5,155 4,162
Merger-related 5,789 4,535 416
Depreciation and amortization 23,470 11,074 4,128
Interest expense 6,602 3,241 1,216
Other expense (income), net 4,397 (4,811) (2,289)
------------- ------------- --------------
Total expenses 520,514 301,868 163,233
------------- ------------- --------------
Income from continuing operations before income
tax expense 25,879 57,600 16,283
Income tax expense 14,449 20,590 4,224
------------- ------------- --------------
Income from continuing operations 11,430 37,010 12,059
Income (loss) from operations of discontinued business (net of income tax
(benefit) expense of $(1,068), $3,275 and
$3,123, respectively) (3,596) 6,880 7,992
Loss on disposal of discontinued business (net of income tax
benefit of $210, $0, and $305, respectively) (391) - (572)
------------- ------------- --------------
Net income $ 7,443 $ 43,890 $ 19,479
============= ============= ==============
Earnings (loss) per share:
Basic:
Income from continuing operations $ 0.13 $ 0.55 $ 0.24
Income (loss) from discontinued operations (0.04) 0.10 0.15
------------- ------------- --------------
Net income per share $ 0.09 $ 0.65 $ 0.39
============= ============= ==============
Diluted:
Income from continuing operations $ 0.12 $ 0.46 $ 0.20
Income (loss) from discontinued operations (0.04) 0.08 0.12
------------- ------------- --------------
Net income per share $ 0.08 $ 0.54 $ 0.32
============= ============= ==============
Weighted average common shares 86,851 67,880 49,448
============= ============= ==============
Weighted average common shares and dilutive potential
common shares 91,702 81,084 61,412
============= ============= ==============
Pro forma income data - unaudited:
Income from continuing operations $ 11,430 $ 37,010 $ 12,059
Pro forma adjustment for income tax expense 1,762 1,767 1,702
------------- ------------- --------------
Pro forma income from continuing operations $ 9,668 $ 35,243 $ 10,357
============= ============= ==============
Pro forma earnings per share from continuing operations:
Basic earnings per share $ 0.11 $ 0.52 $ 0.21
============= ============= ==============
Diluted earnings per share $ 0.11 $ 0.43 $ 0.17
============= ============= ==============
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-4
<PAGE> 35
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Shares Stock Capital Earnings
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
December 31, 1996 46,333 $ 463 $ 86,273 $ 19,783
Comprehensive income:
Net income - - - 19,479
Foreign translation and
other - - - -
Change in unrealized
appreciation, net of tax - - - -
------------ ----------- ----------- -----------
Total comprehensive
income - - - 19,479
------------ ----------- ------------ -----------
Pre-merger transactions of
pooled entities - - 959 (9,893)
Stock issuances 617 6 5,261 -
Stock options 53 1 334 -
Warrants 533 5 2,819 -
Business acquisitions 6,497 65 38,657 -
------------ ------------------------- -----------
December 31, 1997 54,033 540 134,303 29,369
Comprehensive income:
Net income - - - 43,890
Foreign translation and
other - - - -
Change in unrealized
appreciation, net of tax - - - -
------------ ------------------------- -----------
Total comprehensive
income - - - 43,890
------------ ------------------------- -----------
Pre-merger transactions of
pooled entities - - (708) (3,932)
Stock issuances 3,800 38 47,657 -
Stock options 61 1 679 -
Warrants 8,902 88 35,378 -
Business acquisitions 12,764 128 119,434 -
------------ ----------- ------------ -----------
December 31, 1998 79,560 795 336,743 69,327
Comprehensive income:
Net income - - - 7,443
Foreign translation and
other - - - -
Change in unrealized
appreciation, net of tax - - - -
------------ ------------------------- -----------
Total comprehensive
income - - - 7,443
------------ ----------- ------------ -----------
Pre-merger transactions of
pooled entities - - (32) (2,600)
Allocation of ESOP shares - - 164 -
Purchase of treasury stock - - - -
Stock issuances 1,744 18 24,982 -
Stock options 1 - 267 -
Warrants 4,365 44 18,480 -
Business acquisitions 7,671 76 62,448 -
------------ ----------- ------------ -----------
December 31, 1999 93,341 $ 933 $ 443,052 $ 74,170
============ =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Unearned Other
ESOP Treasury Comprehensive
Shares Stock Income Totals
------------ -------- --------------- -----------
<S> <C> <C> <C> <C>
December 31, 1996 $ (3,321) $ (1,084) $ 3,835 $ 105,949
Comprehensive income:
Net income - - - 19,479
Foreign translation and
other - - 2 2
Change in unrealized
appreciation, net of tax - - (2,090) (2,090)
------------ -------- --------------- -----------
Total comprehensive
income - - (2,088) -
------------ -------- --------------- -----------
Pre-merger transactions of
pooled entities 433 (571) - (9,072)
Stock issuances - - - 5,267
Stock options - - - 335
Warrants - - - 2,824
Business acquisitions - - - 38,722
------------ -------- --------------- -----------
December 31, 1997 (2,888) (1,655) 1,747 161,416
Comprehensive income:
Net income - - - 43,890
Foreign translation and
other - - (52) (52)
Change in unrealized
appreciation, net of tax - - (1,576) (1,576)
------------ -------- --------------- -----------
Total comprehensive
income - - (1,628) -
------------ -------- --------------- -----------
Pre-merger transactions of
pooled entities 339 1,581 - (2,720)
Stock issuances - - - 47,695
Stock options - - - 680
Warrants - - - 35,466
Business acquisitions - - - 119,562
------------ -------- --------------- -----------
December 31, 1998 (2,549) (74) 119 404,361
Comprehensive income:
Net income - - - 7,443
Foreign translation and
other - - 63 63
Change in unrealized
appreciation, net of tax - - (2,656) (2,656)
------------ -------- --------------- -----------
Total comprehensive
income - - (2,593) -
------------ -------- --------------- -----------
Pre-merger transactions of
pooled entities 74 (2,558)
Allocation of ESOP shares - - - 164
Purchase of treasury stock 754 (754) -
Stock issuances - - - 25,000
Stock options - - - 267
Warrants - - - 18,524
Business acquisitions - - - 62,524
------------ -------- --------------- -----------
December 31, 1999 $ (1,795) $ (754) $ (2,474) $ 513,132
============ ======== =============== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-5
<PAGE> 36
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 11,430 $ 37,010 $ 12,059
Adjustments to reconcile net income from continuing
operations to net cash provided by (used in) operating
activities:
Consolidation and integration charges 27,433 - -
Note impairment charge 8,952 - -
Gain on sale of business - (1,450) -
Depreciation and amortization 23,470 11,074 4,128
Deferred income taxes (8,787) (2,019) (2,764)
Changes in assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable, net (47,830) (37,723) (16,502)
Other assets (5,703) (7,325) 2,761
Accounts payable 83 10,604 6,098
Income taxes (22,766) 3,532 440
Accrued expenses and other liabilities (8,690) 3,759 10,077
Other, net 4,791 (546) (4,124)
--------- --------- ---------
Net cash provided by (used in) operating activities (17,617) 16,916 12,173
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired (42,994) (76,063) (40,638)
Proceeds from dispositions of businesses - 2,744 10,700
Additions to property and equipment (33,725) (13,194) (3,862)
Net decrease (increase) in notes receivable 1,402 6,067 (2,603)
--------- --------- ---------
Net cash used in investing activities (75,317) (80,446) (36,403)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 226,000 92,075 8,401
Proceeds from notes payable and capitalized leases 13,003 5,460 5,542
Payment of bank debt (126,000) (56,476) -
Payment of notes payable and capitalized leases (55,989) (38,559) (7,541)
Pre-merger equity transactions (2,558) (2,720) (9,072)
Proceeds from stock issuances 25,000 47,695 5,267
Proceeds from exercise of stock options and warrants 18,791 36,146 3,159
--------- --------- ---------
Net cash provided by financing activities 98,247 83,621 5,756
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 5,313 20,091 (18,474)
Cash and cash equivalents at beginning of year 43,593 23,502 41,976
--------- --------- ---------
Cash and cash equivalents at end of year $ 48,906 $ 43,593 $ 23,502
========= ========= =========
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-6
<PAGE> 37
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Century Business Services, Inc. and subsidiaries (Century or the Company)
is a diversified services company which, acting through its subsidiaries,
provides professional outsourced business services primarily to small and
medium-sized businesses, as well as individuals, governmental entities,
and not-for-profit enterprises throughout the United States and Toronto,
Canada. Century offers integrated services in the following areas:
accounting, tax, valuation, and advisory services; benefits
administration and insurance services; human resources and payroll
services; performance consulting services; information technology
services; and specialty insurance (classified as discontinued).
Basis of Consolidation
The accompanying consolidated financial statements include the accounts
of Century and its wholly owned subsidiaries. The consolidated financial
statements have been restated for business combinations accounted for as
a pooling-of-interests as if such combined companies had operated as one
entity since inception. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounting Estimates
In preparing the consolidated financial statements, management is
required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of revenues and expenses
for the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand, funds held on deposit and
short-term highly liquid investments with a maturity of three months or
less at the date of purchase. The carrying amount approximates fair value
because of the short maturity of those instruments.
Restricted cash represents funds on deposit from clients for which
Century is administering and settling claims. A related liability for
these funds is recorded in accrued expenses and other liabilities in the
consolidated balance sheet.
Other Financial Instruments
The carrying amount of Century's accounts receivable and payables
approximates fair value because of the short maturity of these
instruments. The carrying value of bank debt approximates fair value. The
interest rate on the bank debt is variable and approximates current
market rates.
Goodwill
Goodwill is being amortized on a straight-line basis over the expected
periods to be benefited. During the fourth quarter of 1999, Century
shortened its goodwill amortization period from periods up to 40 years to
15 years, beginning October 1, 1999. It is Century's policy to evaluate
continually the period of amortization and recoverability of goodwill
based on an evaluation of such factors as the occurrence of a significant
adverse event or change in the environment in which the business operates
or if the expected future net cash flows, undiscounted and without
interest, would become less than the carrying amount of the asset. An
impairment loss would be recorded in the period such determination is
made based on the fair value of the related businesses. Amortization
expense from continuing operations was approximately $12,683,000,
$4,841,000 and $1,334,000 in 1999, 1998 and 1997, respectively.
Property and Equipment
F-7
<PAGE> 38
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided
on the straight-line basis over estimated useful lives.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Revenue Recognition
Century recognizes revenue from professional services as the related
services are provided. Century 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.
All reimbursements of out-of-pocket expenses are netted against the
related expense item and reported in "operating expenses" in the
consolidated statements of income. The cumulative impact of any
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. Century also bills administration fees for
administering their customers' self-insured health plans. Administration
fees are based on a fixed amount per eligible life per month. Century
receives reinsurance commissions from the various reinsurance carriers
utilized. The reinsurance commissions are determined by the terms of the
reinsurance carrier agreements. Reinsurance commissions are accrued over
the period in which the related income is recognized.
Premiums from short-duration contracts ordinarily are recognized as
revenue over the contract period in proportion to the amount of insurance
protection provided. Premiums from long-duration contracts, such as
whole-life contracts (including limited-payment and single-premium life
contracts), guaranteed renewable term life contracts, annuity contracts,
and title insurance contracts, are recognized as revenue when due from
policyholders. Century recognizes commission income principally on the
later of the effective date of the policy or the billing date. Contingent
commissions, which include retrospective commission and experience rated
commissions, are accrued over the period in which the related income is
earned. Service fee income is recognized as earned, which is ordinarily
over the period in which the services are provided.
Bad debt expense for the years ended December 31, 1999, 1998 and 1997 was
$9.8 million, $2.3 million and $2.2 million, respectively.
Earnings per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of stock options,
warrants and contingent shares.
Stock Options
Compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. Century
provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value-based
method had been applied. See Note 8.
New Accounting Standard
F-8
<PAGE> 39
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
Among other provisions, it requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Gains and losses
resulting from changes in the fair values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was
delayed via the issuance of SFAS No. 137. The effective date for SFAS No.
133 is now for fiscal years beginning after June 15, 2000, though earlier
adoption is encouraged and retroactive application is prohibited. This
means that Century must adopt the standard no later than January 1, 2001.
Century does not expect the adoption of this standard to have a material
impact on its results of operations, financial position or cash flows.
Reclassifications
Certain amounts in the prior period consolidated financial statements
have been reclassified to conform to the current year's presentation.
2. ACQUISITIONS
During fiscal 1999, Century slowed its strategic acquisition program,
purchasing the businesses of thirty-five complementary companies. These
acquisitions comprised the following: twenty-one business solutions
companies; eleven benefits, insurance, wealth management, and payroll
solutions companies; two technology solutions companies; and one
performance consulting solutions company.
Thirty of the acquisitions were accounted for under the purchase method
of accounting, and accordingly, the operating results of the acquired
companies have been included in the accompanying consolidated financial
statements since the dates of acquisition. The aggregate purchase price
of these acquisitions was approximately $77.7 million, comprised of $29.7
million in cash, $0.5 million in assumed liabilities, and 5.6 million
shares of restricted common stock (estimated fair value of $47.5 million
at acquisition). The aggregate purchase price excludes future contingent
consideration of up to $21.7 million, comprised of $10.1 million in cash
and notes and 1.5 million shares of restricted common stock (estimated
stock value of $11.6 million at acquisition), which is based on the
acquired companies' ability to meet or exceed certain performance goals.
The aggregate purchase price, excluding future contingent consideration,
has been allocated to the net assets of the acquired companies based upon
their respective fair market values. The excess of the purchase price
over fair value of net assets acquired (goodwill) approximated $71.9
million and is being amortized over a 15 year period. As a result of the
nature of the assets and liabilities of the businesses acquired, there
were no material identifiable intangible assets or liabilities. Future
contingent consideration is recorded as additional purchase price when
performance goals have been met and shares and cash have been released
from escrow.
The following data summarizes, on an unaudited pro forma basis, the
combined results from continuing operations of Century and the businesses
acquired during 1999 under the purchase method of accounting, as if they
had occurred on January 1, 1998. The pro forma amounts give effect to
appropriate adjustments resulting from the combination, but do not give
effect to the planned divestiture of four smaller non-core operations
(see Note 14) and are not necessarily indicative of future results of
operations or of what results would have been for the combined companies
(in thousands, except per share data):
F-9
<PAGE> 40
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Unaudited
---------
1999 1998
----------------- -------------------
<S> <C> <C>
Revenues - pro forma $ 582,517 $ 429,114
================= ===================
Net income - pro forma (a) $ 14,823 $ 45,938
================= ===================
Earnings per share - pro forma (a)
- basic $ 0.16 $ 0.63
================= ===================
- diluted $ 0.16 $ 0.53
================= ===================
</TABLE>
-----------------
(a) includes after-tax expenses of $25.5 million related to
Century's integration and consolidation charges and note impairment
charge recorded in the fourth quarter of 1999.
Century exchanged 6.7 million shares of its common stock for all of the
respective common stock of five acquisitions accounted for under the
pooling-of-interest method of accounting for business combinations.
Accordingly, Century's consolidated financial statements have been
restated to include the results of the pooled entities for all periods
presented.
Revenues and net income from continuing operations for Century and the
pooled entities prior to their respective mergers for the year ended
December 31, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- -------------
<S> <C> <C> <C>
Revenues $ $ $
Century 509,160 297,520 126,304
Pooled entities 37,233 61,948 53,212
---------------- -------------- -------------
Combined $ 546,393 $ 359,468 $ 179,516
================ ============== =============
Net income from continuing operations
Century (a) $ 5,708 $ 32,721 $ 8,836
Pooled entities 5,722 4,289 3,223
---------------- -------------- -------------
Combined $ 11,430 $ 37,010 $ 12,059
================ ============== =============
</TABLE>
------------------
(a)includes after-tax expenses of $25.5 million related to
Century's integration and consolidation charges and note
impairment charge recorded in the fourth quarter of 1999.
There were no significant transactions between Century, and the pooled
entities prior to the combination. Certain reclassifications were made to
the pooled entities financial statements to conform to Century's
presentations.
Several of the aforementioned pooling-of-interests transactions involved
enterprises that previously had not been subjected to income taxes.
Accordingly, pro forma adjustments have been presented in the
consolidated statements of income.
Merger transaction costs consist primarily of fees for attorneys,
accountants, financial advisors, printing and other related charges. All
pooling transaction costs are expenses as incurred.
F-10
<PAGE> 41
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
Included in other assets (non-current) at December 31, 1999 and 1998, are
investments accounted for under the cost and equity method of accounting
of $2.5 million and $0, respectively. In 1999, Century acquired an
ownership interest of approximately 20% in Fundscape.com, which is being
accounted for under the equity method. At December 31, 1999, Century's
investment in Fundscape.com was $0.8 million, which includes its
proportionate share of Fundscape.com's operating losses for 1999 of $0.2
million. Century also has a 3% ownership interest in QuikCAT.com, which
is being accounted for under the cost method. At December 31, 1999,
Century's investment in QuikCAT.com was $1.8 million. In addition,
Century has an outstanding trade receivable from QuikCAT.com of $1.3
million. Although the market value of Century's investments in
Fundscape.com and QuikCAT.com are not readily determinable, management
believes the fair value of these investments exceeds their carrying
amounts.
4. INCOME TAXES
The components of income tax expense (benefit) included in the
consolidated statements of income are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal and international $ 20,991 $ 19,099 $ 5,773
State and local 2,245 3,510 1,215
------------ ------------ ------------
23,236 22,609 6,988
Deferred (8,787) (2,019) (2,764)
------------ ------------ ------------
Total continuing operations 14,449 20,590 4,224
Discontinued operations (1,278) 3,275 2,818
------------ ------------ ------------
$ 13,171 $ 23,865 $ 7,042
============ ============ ============
</TABLE>
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal
statutory income tax rate to income from continuing operations before
income taxes, as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax at statutory rate $ 9,058 $ 20,160 $ 5,699
State taxes (net of federal benefit) 658 2,085 595
Change in valuation allowance - (1,379) (908)
Nondeductible goodwill 3,837 1,413 383
Acquired nontaxable entities (1,762) (1,767) (1,702)
Disposal of non-core business units 2,163 - -
Other, net 495 78 157
------------ ------------ ------------
Provision for income tax from continuing
operations $ 14,449 $ 20,590 $ 4,224
============ ============ ============
Effective income tax rate 55.8% 35.7% 25.9%
============ ============ ============
Pro forma effective income tax
rate on pooled entities - unaudited 62.6% 38.8% 36.4%
============ ============ ============
</TABLE>
F-11
<PAGE> 42
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities from
continuing operations at December 31, 1999 and 1998, are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 2,276 $ 1,718
Deferred compensation 2,020 3,462
Allowance for doubtful accounts 3,660 1,311
Consolidation and integration 5,217 -
Note receivable impairment charge 3,133 -
Other deferred tax assets 845 611
-------------- --------------
Total gross deferred tax assets 17,151 7,102
Less: valuation allowance (756) (756)
-------------- --------------
Net deferred tax assets 16,395 6,346
-------------- --------------
DEFERRED TAX LIABILITIES:
Change in accounting method 12,333 7,940
Deferred commission revenues 1,985 841
Fixed asset basis differential 2,607 1,131
Other deferred tax liabilities 1,526 1,020
-------------- --------------
Total gross deferred tax liabilities 18,451 10,932
-------------- --------------
Net deferred tax liability $ 2,056 $ 4,586
============== ==============
</TABLE>
Century had net operating loss (NOL) carryforwards from continuing
operations of approximately $5,135,000 and $4,295,000 at December 31,
1999 and 1998, respectively, from the separate return years of certain
acquired entities. These losses are subject to limitations regarding the
offset of Century's future taxable income and will begin to expire in
2007.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Century determines a valuation allowance based on its analysis of amounts
available in the statutory carryback period, consideration of future
deductible amounts, and assessment of the separate company profitability
of certain acquired entities. Century has established valuation
allowances for portions of acquired NOL carryforwards. There was no
change in the valuation allowance for the years ended December 31, 1999
and 1998. The portion of the valuation allowance for deferred tax assets
for which subsequently recognized tax benefits will be allocated to
reduce goodwill of acquired entities was $756,000 at December 31, 1999
and 1998.
5. BANK DEBT, NOTES PAYABLE AND CAPITALIZED LEASES
Bank debt, notes payable and capitalized leases, consist of the following
(in thousands):
<TABLE>
<CAPTION>
December 31
----------------------------------------
1999 1998
----------------- ------------------
Bank debt:
<S> <C> <C>
Revolving credit facilities, effective rates of 6.25% to 8.50% $ 144,000 $ 44,000
================= ==================
Notes payable and capitalized leases:
Promissory notes payable to former owners of acquired
businesses, various rates, due 1999 to 2006 $ 2,291 $ 24,793
</TABLE>
F-12
<PAGE> 43
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Other notes payable, various rates, due 1999 to 2005 4,691 16,742
Capitalized leases, various rates, payable in
installments through 2004 897 436
----------------- ------------------
$ 7,879 $ 41,971
================= ==================
</TABLE>
The Company has a $250 million credit facility with a group of banks. The
bank credit facility carries a commitment fee on the unused amount of the
credit facility. The interest rate is based on a margin plus a base rate
that is selected by the Company at the time of the borrowings. The base
rate is (a) the higher of 0.50% per annum above the latest Federal Funds
Rate or the rate in effect from time to time announced by the Bank of
America, San Francisco, California offices as its "reference rate" or (b)
the offshore rate. Borrowings and commitments by the banks under the
credit facility mature in 2004.
The bank credit agreement contains certain financial covenants. The bank
credit agreement currently contains the following more significant
financial covenants: (i) maintenance of a minimum consolidated net worth
equal to a base amount of $469 million plus 70% of the Company's positive
net income plus 100% of the cash and non cash proceeds of any equity
securities issued by the Company; (ii) a consolidated leverage ratio that
cannot exceed 2.50:1.00; (iii) minimum interest coverage ratio's of at
least 4.50:1.00 through December 31, 1999, 4.75:1.00 through December 31,
2000 and 5.00:1.00 thereafter until maturity; and (iv) dividends cannot
be paid without the prior written approval of the bank group. (The
Company was not in compliance with the minimum net worth requirement as
of December 31, 1999. See Note 13 for discussion of the amendment to the
bank credit agreement.)
The bank credit agreement also places significant restrictions on the
Company's ability to create liens or other encumbrances, to make certain
payments (including dividends), investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of assets, or to merge
or consolidate with an unaffiliated entity. The agreement contains a
provision that, in the event of a defined change in control, the
agreement may be terminated.
At December 31, 1999, aggregate maturities of notes payable, bank debt
and capitalized leases, were as follows (in thousands):
YEARS ENDING DECEMBER 31,
2000 $ 6,534
2001 276
2002 479
2003 305
2004 144,199
Thereafter 86
-----------------
$ 151,879
=================
Management believes that the carrying amounts of bank debt, notes
payable, and capitalized leases recorded at December 31, 1999 approximate
fair values.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
Century leases certain of its premises and equipment under various
operating lease agreements. At December 31, 1999, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
F-13
<PAGE> 44
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31,
2000 $ 23,449
2001 19,123
2002 14,296
2003 9,732
2004 9,486
Thereafter 21,769
----------------
$ 97,855
================
Total rental expense incurred under operating leases was approximately
$26,261,000, $15,830,000 and $7,265,000 in 1999, 1998 and 1997,
respectively.
Other
-----
In September 1999, three purported stockholder class-action lawsuits were
filed in the United States District Court for the Northern District of
Ohio against Century and certain of its current and former directors and
officers. Subsequently, these three actions were consolidated into a
single case, Darby, et al. v. Century Business Services, Inc., et al.,
filed January 28, 2000, alleging violations of the Securities Exchange
Act of 1934 in connection with certain statements made during the period
from February 6, 1998 to November 23, 1998, by, among other things,
misstating revenue run rates, improperly accounting for certain
acquisitions, improperly amortizing goodwill, and failing to disclose
certain adverse information of which the defendants were aware.
In February 2000, two additional purported stockholder class-action
lawsuits - Gochman, et al. v. Century Business Services, Inc., et al. and
Korn, et al. v. Century Business Services, Inc., et al. - were filed in
the United States District Court for the Northern District of Ohio and
one additional purported stockholder class-action lawsuit - Albert, IV,
et al. v. Century Business Services, Inc., et al. - was filed in the
United States District Court for the District of Maryland, against
Century and certain of its current and former directors and officers. The
plaintiffs in these cases alleged violations of the Securities Exchange
Act of 1934 in connection with certain statements made during the period
from February 9, 1999 to January 28, 2000, by, among other things,
improperly amortizing goodwill and failing adequately to monitor changes
in operating results. Century expects that the Albert action will be
transferred to the United States District Court for the Northern District
of Ohio, that all of the actions will be consolidated, and an amended
complaint will be filed. None of these events has yet taken place.
On March 2, 2000, an additional purported stockholder class-action
lawsuit - Marsh, et al. v. Century Business Services, Inc., et al. - was
filed in the United States District Court for the Northern District of
Ohio against Century and certain of its current and former directors and
officers. The plaintiffs in this case made similar allegations for the
time period from March 4, 1999 to January 28, 2000 inclusive.
There has been no discovery in any of the actions. Century and the named
director and officer defendants deny all allegations of wrongdoing made
against them in these actions and intend to vigorously defend each of
these lawsuits. Although the ultimate outcome of the aforementioned
litigation is uncertain, based on the allegations contained in the
complaints, management does not believe that these lawsuits will have a
material adverse effect on the financial condition, results of operations
or cash flows of Century.
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.
7. EMPLOYEE BENEFITS
F-14
<PAGE> 45
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Century has profit sharing plans covering substantially all of its
employees. Participating employees may elect to contribute, on a
tax-deferred basis, a portion of their compensation, in accordance with
Section 401(k) of the Internal Revenue Code. Employer contributions made
to the plans in 1999, 1998 and 1997, amounted to approximately
$4,675,000, $2,462,000, and $1,386,000, respectively.
As a result of two acquisitions, Century has employee stock ownership
plans (ESOP) at two of its subsidiaries. One ESOP was the result of a
1998 acquisition and all of the shares have been allocated to the
participants and the related expense of approximately $0.2 million has
been included in the 1999 statement of operations. Both ESOPs have been
frozen and therefore there will be no future allocations to participants.
8. COMMON STOCK
Century's authorized common stock consists of 250,000,000 shares of
common stock, par value $0.01 per share (Common Stock). The holders of
Century's common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders. There are no cumulative
voting rights with respect to the election of directors. Accordingly, the
holder or holders of a majority of the outstanding shares of Common Stock
will be able to elect the directors of Century then standing for election
as terms expire. Holders of Common Stock have no preemptive rights and
are entitled to such dividends as may be declared by the Board of
Directors of Century out of funds legally available therefor. The Common
Stock is not entitled to any sinking fund, redemption or conversion
provisions. On liquidation, dissolution or winding up of Century, the
holders of Common Stock are entitled to share ratably in the net assets
of Century remaining after the payment of any and all creditors. The
outstanding shares of Common Stock are duly authorized, validly issued,
fully paid and nonassessable. The transfer agent and registrar for the
Common Stock is Firstar Bank, N.A.
Century completes registration filings related to its Common Stock to
register shares under the Securities Act of 1933. To date, Century has
registered the following shares of Common Stock for the following
purposes: (i) 12.2 million shares, of which approximately
11.4 million shares remain available for resale from time to time
by selling stockholders under various shelf registration statements which
are less than one year old; (ii) $125 million in shares of our Common
stock, debt securities, and warrants to purchase common stock or debt
securities, of which $100 million remain available to be offered from
time to time to the public under our universal shelf registration
statement; and (iii) 15 million shares of our Common Stock, all of which
remain available to be offered from time to time in connection with
acquisitions under our acquisition shelf registration statement.
In February 1999, Century issued 1,800,000 restricted shares of common
stock and 900,000 warrants to an outside party for a $25 million equity
investment in Century. Fifty percent of the common stock is subject to a
one-year lock-up restriction, while the remaining common stock is subject
to a two-year lock-up restriction, and warrants to purchase shares of
common stock may be exercised under the following terms: 300,000 shares
for three years at $20 per share; 300,000 shares for four years at $25
per share; and 300,000 for five years at $30 per share.
In February and May of 1998, Century completed a private placement in
which it sold an aggregate of 3,800,000 shares of Common Stock to
qualified investors at an aggregate purchase price of $13.25 per share
and realized $47.7 million in proceeds.
In April 1997, Century completed a private placement in which Century
sold an aggregate of 616,611 units to qualified investors at an aggregate
purchase price of $9.00 per Unit. Each unit consisted of one share of
common stock and one warrant to purchase one share of common stock at an
exercise price of $11.00 per share, exercisable for a three year period
from the date of issuance. Century realized net proceeds of approximately
$5,300,000.
Warrants
In connection with the spin off of the hazardous waste operations
(including Century's predecessor company) to the stockholders of Republic
Industries, Inc. (the "RESI Transaction") in 1996, RESI agreed to issue
to
F-15
<PAGE> 46
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
holders of unexpired warrants of its former parent, additional RESI
warrants to acquire shares of RESI's Common Stock equal to one fifth of
the number of shares available. At the Distribution date, RESI adjusted
the per share exercise price of the RESI warrants to reflect the effect
of the distribution on the market prices of RESI and its former parent's
common stock. These warrants are designated as stapled warrants and
expire at various dates through December 2000. The holders of these
warrants are able to exercise under the original terms of the warrants
and will receive Company stock.
In addition to warrants issued through the RESI Transaction, Century also
issued warrants in connection with private placements completed in
October 1996, December 1996, and April 1997, and granted warrants in
connection with certain acquisitions made during 1997. Portions of the
warrants issued in connection with 1997 acquisitions are restricted from
being transferred in accordance with various lock-up agreements between
the former shareholders of the acquired entities and Century.
During 1999, certain holders of warrants issued in connection with 1997
acquisitions gave up demand registration rights due to them. In November
1999, the Board of Directors extended the expiration dates of the
aforementioned warrant holders by an additional twelve months in
consideration of forgoing demand registration rights. In December 1999,
the Board of Directors extended the expiration dates of certain warrants
outstanding from the December 1996 and April 1997 private placements
through June 2000. As consideration for the extension of the term, the
holders of the warrants will pay the original exercise price, plus a
premium for each month from the original expiration date to the exercise
date, upon exercise of the warrants.
Information relating to warrants to purchase common stock is summarized
below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ---------------
<S> <C> <C> <C>
Outstanding at beginning of year 13,477 22,379 20,786
Granted /Issued 900 - 2,126
Exercised (4,365) (8,902) (533)
----------------- ----------------- ---------------
Outstanding at end of year (a) 10,012 13,477 22,379
----------------- ----------------- ---------------
Subject to Lock-Up Provisions - 1,071 1,806
================= ================= ===============
Exercisable at end of year 10,012 12,406 20,573
================= ================= ===============
</TABLE>
(a) Exercise prices for warrants outstanding at December 31, 1999 ranged
from $1.60 to $30.00. Exercise prices for warrants outstanding at
December 31, 1998 and 1997, ranged from $1.075 to $13.06.
Stock Options
Under the 1997 Agents Stock Option Plan, a maximum of 1,200,000 options
may be awarded. The purpose of the plan is to provide performance-based
compensation to certain insurance agencies and individual agents who
write quality surety business for Century's insurance subsidiaries. The
options vest only to the extent the agents satisfy minimum premium
commitments and certain loss ratio performance criteria. The options
terminate in June 2002, or earlier under certain conditions, including
termination of the agency agreement.
Under the 1996 Employee Stock Option Plan, a maximum of 7,000,000 options
may be awarded. The options awarded are subject to a 20% incremental
vesting schedule over a five-year period commencing from the date of
grant. The options are awarded at a price not less than fair market value
at the time of the award and expire six years from the date of grant.
Further, under the 1996 plan 250,000 options were granted to non-employee
directors. These options became exercisable immediately upon being
granted with a five-year expiration term from the date of grant.
F-16
<PAGE> 47
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Prior to the RESI Transaction, certain options were granted to employees,
directors and affiliates of RESI's former parent company. When RESI was
spun-off in April 1995 (the "Distribution Date"), optionees received
options to acquire RESI Common Stock at the ratio of one RESI option for
each five options under the former parent's 1990 and 1991 Stock Option
plans. The outstanding options at the Distribution Date and the RESI
options granted with respect thereto are stapled and are only exercisable
if exercised together. As a result of the sale of RESI in July 1997,
options under these plans became fully vested. These options remain
vested as long as the optionee is employed by the former parent, RESI or
their affiliates. The option price is based on the fair market value of
the common shares on the date of grant.
Information relating to the stock option plans is summarized below (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of year 3,581 2,061 317
Granted (a) 1,951 1,625 1,871
Exercised (b) (2) (61) (53)
Expired or canceled (136) (44) (74)
------------ ------------ ------------
Outstanding at end of year (c) 5,394 3,581 2,061
------------ ------------ ------------
Exercisable at end of year (d) 969 470 568
============ ============ ============
Available for future grant at the end of year 2,806 1,840 343
============ ============ ============
</TABLE>
(a) Options were granted at average costs of $14.05, $16.44 and $11.69 in
1999, 1998 and 1997, respectively.
(b) Options were exercised at prices ranging from $1.08 to $9.63 and
averaging $5.35 in 1999, prices ranging from $1.08 to $11.00 and
averaging $6.64 in 1998, and prices from $1.08 to $2.31 and averaging
$1.68 in 1997.
(c) Exercise prices for options outstanding at December 31, 1999 ranged from
$1.08 to $17.75 and averaged $13.83 with expiration dates ranging from
June 2000 to June 2005. Exercise prices for options outstanding at
December 31, 1998 ranged from $1.08 to $17.75 and averaged $13.72 with
expiration dates ranging from June 2000 to October 2004. Exercise prices
for options outstanding at December 31, 1997 ranged from $1.08 to $12.50
and averaged $10.49 with expiration dates ranging from July 1998 to
October 2003.
(d) Exercise prices for options exercisable at December 31, 1999, 1998, and
1997 averaged $11.67, $9.25 and $7.11, respectively.
Had the cost of stock option plans been determined based on the fair value of
options at the grant date, Century's net income and earnings per share pro forma
amounts (from continued operations) would be as follows (amounts in thousands,
except per share data):
<TABLE>
<CAPTION>
As Reported Pro Forma
Basic Diluted Basic Diluted
--------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
1999
----
Net income $ 11,430 $ 11,430 $ 9,054 $ 9,054
========= ============ ========== ===========
Net income per share $ 0.13 $ 0.12 $ 0.11 $ 0.10
========= ============ ========== ===========
1998
----
Net income $ 37,010 $ 37,010 $ 35,927 $ 35,927
========= ============ ========== ===========
Net income per share $ 0.55 $ 0.46 $ 0.53 $ 0.44
========= ============ ========== ===========
1997
----
Net income $ 12,059 $ 12,059 $ 11,727 $ 11,727
========= ============ ========== ===========
Net income per share $ 0.24 $ 0.20 $ 0.24 $ 0.19
========= ============ ========== ===========
</TABLE>
The above results may not be representative of the effects on net income for
future years.
F-17
<PAGE> 48
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Century applied the Black-Scholes option-pricing model to determine the
fair value of each option granted in 1999, 1998 and 1997. Below is a
summary of the assumptions used in the calculation:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate 6.30% 6.07% 6.01%
Dividend yield - - -
Expected volatility 30.00% 35.00% 35.00%
Expected option life (in years) 3.75 3.75 3.75
</TABLE>
The stock options issued to key employees in 1999 were assumed to vest at
a rate of 100%.
9. EARNINGS PER SHARE
For the years presented, Century presents both basic and diluted earnings
per share from continuing operations. The following data shows the
amounts used in computing earnings per share and the effect on the
weighted average number of shares of dilutive potential common stock
(amounts in thousands, except per share data). Included in potential
dilutive shares are contingent shares, which represent shares issued and
placed in escrow that will not be released until certain performance
goals have been met.
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
------------- ------------- ---------------
(in thousands, except per share data)
--------------------------------------------------
<S> <C> <C> <C>
Numerator
Net income from continuing operations (a) $ 11,430 $ 37,010 $ 12,059
Denominator:
Basic
Weighted average common shares 86,851 67,880 49,448
Diluted
Warrants 4,411 12,506 11,721
Options 228 458 243
Contingent shares 212 240 -
------------- ------------- ---------------
Total 91,702 81,084 61,412
============= ============= ===============
Basic EPS from continuing operations (a) $ 0.13 $ 0.55 $ 0.24
============= ============= ===============
Diluted EPS from continuing operations (a) $ 0.12 $ 0.46 $ 0.20
============= ============= ===============
Pro forma income data from continuing operations
- unaudited (b):
Pro forma net income $ 9,668 $ 35,243 $ 10,357
============= ============= ===============
Basic EPS $ 0.11 $ 0.52 $ 0.21
============= ============= ===============
Diluted EPS $ 0.11 $ 0.43 $ 0.17
============= ============= ===============
</TABLE>
- - ----------------
(a) Includes after-tax expenses of $25.5 million related to Century's
integration and consolidation charges and note impairment charge recorded
in the fourth quarter of 1999.
(b) Pro forma income data from continuing operations reflects pro forma tax
adjustments for acquisitions accounted for under the pooling-of-interests
transactions that were not subject to income taxes.
Basic earnings per share was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share for the years 1999, 1998 and 1997 were determined on the
assumption that the options, warrants and contingent shares were exercised or
earned at the beginning of the period, or at time of issuance, if later.
F-18
<PAGE> 49
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. SUPPLEMENTAL CASH FLOW DISCLOSURES
During 1999, Century provided aggregate consideration of $0.5 million in
the form of notes payable (to mature within one year at a specified time)
in lieu of cash in conjunction with two purchases of client lists.
During 1998, Century provided aggregate consideration of $18 million in
the form of notes payable in early 1999 in lieu of cash in conjunction
with two purchase acquisitions. In addition, Century received a $3
million note receivable in connection with the sale of M&N Risk
Management and M&N Enterprise, Inc.
<TABLE>
<CAPTION>
Cash paid during the year for (in thousands): 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest $ 6,813 $ 2,590 $ 1,012
============ ============ ============
Income taxes $ 39,521 $ 18,635 $ 5,460
============ ============ ============
</TABLE>
11. RELATED PARTIES
The office building utilized by SMR & Co. Business Services (a subsidiary
of Century) is leased under a ten-year lease, expiring February 26, 2006,
from a partnership in which former Senior Vice President's spouse is a
one-third owner. The lease provides for rental payments of $557,700 per
year. A number of the businesses acquired since October 1996 are located
in properties owned indirectly by and leased from persons employed by
Century. In the aggregate, in 1999, Century paid approximately $2.1
million under such leases, which were at competitive market rates.
Rick L. Burdick, a director of Century, is a partner of Akin, Gump,
Strauss, Hauer & Feld, L.L.P. Akin, Gump performed substantial legal work
for Century during 1999 for which the firm received $458,742 from
Century.
Century and/or its subsidiaries maintain joint-referral relationships and
service agreements with licensed CPA firms under which Century
subsidiaries provide administrative services (including office,
bookkeeping, accounting, and other administrative services, preparing
marketing and promotion materials, and leasing of administrative and
professional staff) in exchange for a fee.
12. DIVESTITURES
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, and Continental Heritage Insurance Company, is
reported as a discontinued operation and the consolidated financial
statements have been reclassified to report separately its net assets and
results of operations. See Note 16, "Discontinued Operations."
In December 1999, Century announced the divestiture of four smaller
non-core business units. The assets of these businesses were written down
to net realizable value (based on estimated sales proceeds), and resulted
in an estimated loss of approximately $7.1 million which is included in
cost of operations in the accompanying consolidated statements of income.
In December 1998, Century sold M&N Risk Management, Inc. and M&N
Enterprises, Inc. for cash and notes, resulting in a gain of
approximately $1.5 million which is included in Other Expense, Net in the
accompanying consolidated statements of income.
F-19
<PAGE> 50
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In December 1997, Century sold Environmental and Commercial Insurance
Agency, Inc. and Environmental and Commercial Insurance Agency of LA,
Inc. for cash consideration resulting in a gain of approximately
$375,000. As part of the transaction, a strategic alliance between
Century and the purchaser was established whereby Century will continue
to have access to environmental resources for the benefit of its
insurance customers after the sale.
In July 1997, Century sold the majority of its environmental services
business, and in September 1997, sold its remaining environmental
operations. Taken together, these transactions for cash and notes
approximated the net book value of the assets sold. Century's contingent
liability is limited to $1.5 million in connection with such
divestitures. Management does not believe Century will experience a loss
in connection with such contingencies.
13. SUBSEQUENT EVENTS
On January 7, 2000, Century acquired Andrew M. Watkins CPA, P.C. Andrew
M. Watkins provides compliance and consulting tax services. The aggregate
purchase price of this acquisition was approximately $0.9 million, which
includes a "holdback payment" of $137,000 in cash based upon receipt of
50% of the aggregate value of the accounts receivables purchased.
Under its existing credit facility, Century was required, among other
things, to have a minimum net worth of approximately $517.9 million as
of December 31, 1999. Century's actual net worth was $513.1 million,
which caused the Company to not be in compliance with the minimum net
worth requirement as of December 31, 1999. On March 24, 2000 the Company
entered into an amendment to its original credit facility with the
significant changes as follows:
- The credit facility was reduced from $250 million to $200
million
- The interest rate was increased by 25 basis points
- The minimum net worth requirement as of December 31, 1999 was
revised to change the base amount used in the calculation,
thereby reducing the requirement from $517.9 million to $510
million at December 31, 1999
- The Company entered into an agreement providing its accounts
receivable as collateral for the credit facility
- The Company's minimum interest coverage ratios of at least
4.50:1.00 through December 31, 1999, 4.75:1.00 through December
31, 2000 and 5.00:1.00 thereafter until maturity were changed to
at least 4.00:1.00 through December 31, 1999, 4.25:1.00 through
December 31, 2000 and 4.50:1.00 thereafter until maturity.
As a result of the amendment, the Company is in compliance with all of
its debt covenants as of December 31, 1999.
F-20
<PAGE> 51
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data are summarized as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1999 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES $ 138,372 $ 132,252 $ 138,119 $ 137,650
============= ============ ================= =================
Income (loss) from continuing operations $ 15,192 $ 14,471 $ 13,081 $ (31,141)
Income (loss) from discontinued operations 706 163 (1,417) (3,439)
------------- ------------ ----------------- -----------------
Net income (loss) $ 15,898 $ 14,634 $ 11,664 $ (34,753)
============= ============ ================= =================
Earnings per share:
Basic -
Continuing operations $ 0.19 $ 0.17 $ 0.15 $ (0.34)
Discontinued operations 0.01 -- (0.02) (0.04)
------------- ------------ ----------------- -----------------
Net income (loss) $ 0.20 $ 0.17 $ 0.13 $ (0.38)
============= ============ ================= =================
Earnings per share:
Diluted -
Continuing operations $ 0.17 $ 0.16 $ 0.14 $ (0.34)
Discontinued operations 0.01 -- (0.02) (0.04)
------------- ------------ ----------------- -----------------
Net income (loss) $ 0.18 $ 0.16 $ 0.12 $ (0.38)
============= ============ ================= =================
Pro forma earnings per share
(from continuing operations):
Basic $ 0.18 $ 0.16 $ 0.15 $ (0.34)
============= ============ ================= =================
Diluted $ 0.17 $ 0.15 $ 0.14 $ (0.34)
============= ============ ================= =================
Basic shares 80,732 84,071 87,014 92,095
============= ============ ================= =================
Diluted shares 88,199 90,632 94,011 92,095
============= ============ ================= =================
1998 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Revenues $ 76,075 $ 80,224 $ 91,118 $ 112,051
============= =========== ================= =================
Income from continuing operations $ 8,043 $ 8,307 $ 9,184 $ 11,476
Income from discontinued operations 1,594 1,747 2,091 1,448
------------- ----------- ----------------- -----------------
Net income $ 9,637 $ 10,054 $ 11,275 $ 12,924
============= =========== ================= =================
Earnings per share:
Basic -
Continuing operations $ 0.14 $ 0.13 $ 0.13 $ 0.15
Discontinued operations 0.03 0.03 0.03 0.02
------------- ----------- ----------------- -----------------
Net income $ 0.17 $ 0.16 $ 0.16 $ 0.17
============= =========== ================= =================
Earnings per share:
Diluted -
Continuing operations $ 0.11 $ 0.11 $ 0.11 $ 0.14
Discontinued operations 0.02 0.02 0.03 0.01
------------- ----------- ----------------- -----------------
Net income $ 0.13 $ 0.13 $ 0.14 $ 0.15
============= =========== ================= =================
Pro forma earnings per share
(from continuing operations):
Basic $ 0.13 $ 0.12 $ 0.13 $ 0.15
============= =========== ================= =================
Diluted $ 0.11 $ 0.10 $ 0.11 $ 0.13
============= =========== ================= =================
Basic shares 58,036 63,200 68,969 75,252
============= =========== ================= =================
</TABLE>
F-21
<PAGE> 52
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Diluted shares 72,384 78,877 82,538 84,602
============= =========== ================= =================
</TABLE>
Certain fourth quarter adjustments were made in 1999 that are significant
to the quarter and to comparisons between quarters. Presented below are
the approximate amounts of adjustments that are the result of fourth
quarter events and their effects recorded in the fourth quarter.
During the fourth quarter of 1999, Century's Board of Directors approved
a plan to consolidate several of its operations in multi-office markets
and integrate certain back-office functions into a shared-services
center. The plan includes 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
charge of $27.4 million, of which $21.0 million is included in operating
expense and $6.4 million is included in corporate general and
administrative expense in the consolidated statements of income. Included
in the consolidation and integration charge is a $4.8 million severance
accrual, of which $3.8 million is included in operating expense and $1.0
million is included in corporate general and administrative expense. The
severance accrual is based on Century's severance plan and other
contractual termination provisions. At December 31, 1999, the severance
accrual was $4.3 million, as $0.5 million in severance payments were made
to individuals identified and accrued for in the plan. Accrued costs for
obligations under various noncancellable leases relate to contractual
payments that were committed to prior to approving the plan, for which no
economic benefit to Century will be subsequently realized.
Century also announced that it would shorten its goodwill amortization
period from periods up to 40 years to 15 years, beginning October 1,
1999. In February 2000, Century became aware of circumstances which led
management to conclude that the collateral (i.e., guarantees from third
parties) associated with notes received in connection with a transaction
previously accounted for as a discontinued operation in 1997 were
impaired, and accordingly, recorded a reserve at December 31, 1999 to
adjust such to net realizable value.
The following table summarizes certain fourth quarter events discussed
above that contributed to Century's net loss reported in the fourth
quarter of 1999:
<TABLE>
<CAPTION>
<S> <C>
Consolidation and integration charges:
Lease consolidation $ 9.4 million
Severance 4.8 million
Shared services 2.5 million
Loss on non-core businesses 7.1 million
Other asset impairment 3.6 million
---------------
Subtotal 27.4 million
Other charges:
Effect of change in goodwill amortization period to 15 years 4.2 million
Additional accounts receivable reserves and write-off's 3.8 million
Note impairment 8.9 million
---------------
Total $ 44.3 million
===============
</TABLE>
F-22
<PAGE> 53
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT DISCLOSURES
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. The business units have
been aggregated based on the following factors: the products and services
are similar, the services are provided to the same customers, and the
long term financial performance of these units is affected by similar
economic conditions, in addition to considering the regulatory
environment of the insurance segment.
The business solutions segment provides accounting, tax, consulting and
business valuation services. The benefits and insurance segment consists
of two business units; the benefits and administration group and the
insurance services group. The benefits and insurance segment provides
benefits administration, business insurance, and payroll services. The
performance consulting segment consists of one business unit; the human
resources group. The performance consulting segment provides human
resources services. The technology solutions segment consists of one
business unit; the information technology group. The technology solutions
segment provides information technology services. These services are
provided to small to medium sized companies in a variety of different
industries including, but not limited to, manufacturing, construction,
healthcare, and automotive industries.
Corporate and other charges represent costs at the corporate office that
are not allocated to the business units, which includes goodwill
amortization for all acquisitions accounted for under the purchase method
of accounting. Also included in corporate and other are consolidation and
integration charges of approximately $21.1 million during 1999. See Note
14.
Century operates in the United States and Toronto, Canada and there is no
one customer that represents a significant portion of sales.
Segment information for the years ended December 31, 1999, 1998, and 1997
was as follows (in thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------
Business Benefits & Performance Technology Corporate
Solutions Insurance Consulting Solutions and other Total
------------ ------------ ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 314,079 $ 172,059 $ 19,631 $ 40,624 $ - $ 546,393
Intercompany revenue 3,330 6,795 4,369 1,121 (15,615) -
Pre-tax income 40,302 35,512 7,120 1,398 (58,453) 25,879
Income tax expense (benefit) 24,669 13,682 3,529 990 (28,421) 14,449
Depreciation and amortization 17,738 3,418 121 382 1,811 23,470
Interest expense 895 365 30 232 5,080 6,602
Total assets 162,652 154,886 11,989 17,107 440,709 787,343
---------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------
Business Benefits & Performance Technology Corporate
Solutions Insurance Consulting Solutions and other Total
------------ ------------ ------------- ------------ ------------ ----------
Revenues $ 149,906 $ 150,368 $ 14,637 $ 43,692 $ 865 $ 359,468
Intercompany revenue 6,016 5,571 4,111 1,194 (16,892) -
Pre-tax income 33,698 32,180 6,319 3,854 (18,451) 57,600
Income tax expense (benefit) 12,483 10,779 2,043 1,515 (6,230) 20,590
Depreciation and amortization 6,961 3,093 83 311 626 11,074
Interest expense 454 921 9 (94) 1,951 3,241
Total assets 97,015 98,445 6,386 17,729 360,189 579,764
</TABLE>
F-23
<PAGE> 54
CENTRUY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
1997
-------------------------------------------------------------------------------------------------
Business Benefits & Performance Technology Corporate
Solutions Insurance Consulting Solutions and other Total
------------ ------------ ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 44,568 $ 101,629 $ - $ 32,851 $ 468 $ 179,516
Intercompany revenue 1,607 2,261 - - (3,868) -
Pre-tax income 7,017 13,056 - 48 (3,838) 16,283
Income tax expense (benefit) 2,009 3,390 - 1 (1,176) 4,224
Depreciation and amortization 1,155 2,529 - 219 225 4,128
Interest expense 383 (196) - (193) 1,222 1,216
Total assets 68,896 117,745 - 9,444 58,020 254,105
</TABLE>
16. DISCONTINUED OPERATIONS
In April 1999, Century's Board of Directors approved 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, and Continental Heritage Insurance Company,
is reported as a discontinued operation and the consolidated financial
statements have been reclassified to report separately its net assets and
results of operations. Prior period consolidated financial statements
have been reclassified to the current presentation. Century expects to
enter into a definitive agreement, subject to regulatory approval, in the
second quarter of 2000.
At December 31, 1999 and 1998, the net assets of discontinued operations
for the specialty insurance segment consisted primarily of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Premium receivable $ 10,800 $ 9,284
Investments:
Fixed maturities 5,896 12,156
Securities available for sale 74,724 70,551
Mortgage loans - 740
Short-term investments 5,713 3,470
------------- -------------
Total investments 86,333 86,917
------------- -------------
Deferred policy acquisition costs 4,536 5,746
Reinsurance recoverables 44,305 23,918
Other assets 26,793 26,148
------------- -------------
Total assets 172,767 152,013
------------- -------------
Losses and loss expenses payable 84,520 60,994
Unearned premiums 27,860 29,236
Other liabilities 23,574 15,900
------------- -------------
Total liabilities 135,954 106,130
------------- -------------
Net assets held for discontinued operations 36,813 45,883
============= =============
</TABLE>
F-24
<PAGE> 55
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Operating results of the discontinued segment are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Premiums earned $ 43,716 $ 44,896 $ 37,238
Net investment income 5,037 5,381 4,524
Net gain (loss) on investments (13) 3,001 3,044
Other income 124 1,230 13
------------- ------------- --------------
Total revenues 48,864 54,508 44,819
Expenses:
Loss and loss adjustments 28,644 23,714 20,682
Policy acquisition 16,728 14,932 9,670
Other, net 7,810 5,286 2,331
Depreciation and amortization 346 421 42
------------- ------------- --------------
Total expenses 53,528 44,353 32,725
------------- ------------- --------------
Income (loss) before taxes (4,664) 10,155 12,094
Income tax (benefit) expense (1,068) 3,275 3,439
------------- ------------- --------------
Income (loss) from discontinued operations (3,596) 6,880 8,655
Loss from a previously discontinued operation, net
of tax benefit - - (663)
------------- ------------- --------------
Total (loss) income from discontinued operations $ (3,596) $ 6,880 $ 7,992
============= ============= ==============
Loss on disposal, net of tax $ (391) $ - $ (572)
============= ============= ==============
</TABLE>
INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 5,588 $ 10 $ 159 $ 5,439
Corporate securities 308 - - 308
------------- ------------- ------------- ------------
Totals $ 5,896 $ 10 $ 159 $ 5,747
============= ============= ============= ============
</TABLE>
F-25
<PAGE> 56
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of securities available for sale at
December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Amortized Cost Gains Losses Fair Value
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government agencies $ 4,192 $ 5 $ 37 $ 4,160
Corporate securities 19,744 - 1,470 18,274
Municipal bonds 21,082 - 728 20,354
Mortgage-backed securities 16,473 - 970 15,503
Other asset-backed securities 11,308 3 436 10,875
---------------- ---------------- -------------- --------------
72,799 8 3,641 69,166
Equity securities 5,903 0 345 5,558
---------------- ---------------- -------------- --------------
Totals $ 78,702 $ 8 $ 3,986 $ 74,724
================ ================ ============== ==============
</TABLE>
Expected maturities will differ from contractual maturities because the
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. The amortized cost and estimated fair value
of fixed maturities held to maturity at December 31, 1999, by contractual
maturity, were as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------------------- ---------------------
<S> <C> <C>
Due in one year or less $ 325 $ 325
Due after one year through five years 5,495 5,337
Due after ten years 76 85
-------------------- ---------------------
$ 5,896 $ 5,747
==================== =====================
</TABLE>
The amortized cost and estimated fair value of fixed maturities available for
sale at December 31, 1999, by contractual maturity, were as follows (in
thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------------------- ---------------------
<S> <C> <C>
Due in one year or less $ 1,506 $ 1,501
Due after one year through five years 9,732 9,373
Due after five years through ten years 27,457 25,831
Due after ten years 6,323 6,083
-------------------- ---------------------
45,018 42,788
Mortgage-backed securities 16,473 15,503
Other asset-backed securities 11,308 10,875
-------------------- ---------------------
$ 72,799 $ 69,166
==================== =====================
</TABLE>
The amortized cost and estimated fair value of fixed maturities held to maturity
at December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies $ 8,040 $ 129 $ 13 $ 8,156
Corporate securities 4,044 33 - 4,077
Mortgage-backed securities 72 - - 72
------------- ------------- ------------- ------------
Totals $ 12,156 $ 162 $ 13 $ 12,305
============= ============= ============= ============
</TABLE>
F-26
<PAGE> 57
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of securities available for sale at
December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government agencies $ 1,652 $ 39 $ - $ 1,691
Corporate securities 15,273 30 64 15,239
Municipal bonds 21,825 193 27 21,991
Mortgage-backed securities 18,354 25 36 18,343
Other asset-backed securities 7,465 42 91 7,416
------------- -------------- -------------- ------------
64,569 329 218 64,680
Equity securities 5,936 - 65 5,871
------------- -------------- -------------- ------------
Totals $ 70,505 $ 329 $ 283 $ 70,551
============= ============== ============== ============
</TABLE>
Net investment income was comprised of the following for the years ended
December 31, 1999, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Interest $ 5,051 $ 5,309 $ 4,519
Dividends 327 391 341
-------------- -------------- --------------
Total investment income 5,378 5,700 4,860
Less: investment expense (341) (319) (336)
-------------- -------------- --------------
Net investment income $ 5,037 $ 5,381 $ 4,524
============== ============== ==============
</TABLE>
Realized gains and losses on investments for the years ended December 31, 1999,
1998 and 1997 were are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Realized gains:
Available for sale:
Fixed maturities $ - $ 1,511 $ 26
Equity securities - 1,760 3,066
-------------- -------------- --------------
Total realized gains $ - $ 3,271 $ 3,092
-------------- -------------- --------------
Realized losses:
Available for sale:
Fixed maturities $ 13 $ 97 $ 10
Equity securities - 173 38
-------------- -------------- --------------
Total realized losses 13 270 48
-------------- -------------- --------------
Net realized (losses) gains on investments $ (13) $ 3,001 $ 3,044
============== ============== ==============
</TABLE>
The change in net unrealized appreciation (depreciation) of investments is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Available for sale:
Fixed maturities $ (3,744) $ (683) $ 445
Equity securities (280) (1,495) (3,434)
-------------- -------------- --------------
$ (4,024) $ (2,178) $ (2,989)
============== ============== ==============
</TABLE>
F-27
<PAGE> 58
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of unrealized appreciation (depreciation) on securities available
for sale at December 31, 1999, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Gross unrealized appreciation (depreciation) $ (3,978) $ 46 $ 2,225
Deferred income tax expense (benefit) 1,352 (16) (619)
-------------- -------------- --------------
Net unrealized appreciation (depreciation) $ (2,626) $ 30 $ 1,606
============== ============== ==============
</TABLE>
As a result of the adoption of SFAS 130 in 1998, reclassification adjustments
related to gains on securities available for sale at December 31, 1999, 1998 and
1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -------------
<S> <C> <C> <C>
Holding (losses) gains arising during the period $ (4,037) $ 823 $ 55
Reclassification adjustments for losses (gains) realized in
net income 13 (3,001) (3,044)
------------ ----------- -------------
Other comprehensive loss (4,024) (2,178) (2,989)
Income tax benefit (1,368) (602) (899)
------------ ----------- -------------
Other comprehensive loss, net of tax $ (2,656) $ (1,576) $ (2,090)
============ =========== =============
</TABLE>
Fixed maturities held to maturity and certificates of deposit with a carrying
value of approximately $10,172,000 and $10,085,000 at December 31, 1999 and
December 31, 1998, respectively, were on deposit with regulatory authorities as
required by law. At December 31, 1998, all mortgage loans were secured by
properties in the states of California, Michigan and Ohio.
The following methods and assumptions were used by Century in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments and premiums receivable: The
carrying amounts reported in the consolidated balance sheets for these
instruments are at cost, which approximates fair value.
Investment securities: Fair values for investments in fixed maturities are based
on quoted market prices, where available. For fixed maturities not actively
traded, fair values are estimated using values obtained from independent pricing
services. The fair values for equity securities are based on quoted market
prices.
Mortgage loans: The carrying amounts reported in the consolidated balance sheets
are the aggregate unpaid balances of the loans, which approximates fair value.
DEFERRED POLICY ACQUISITION COSTS
At December 31, 1999, 1998 and 1997 changes in deferred policy acquisition costs
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year $ 5,746 $ 4,478 $ 4,345
Policy acquisition costs deferred 15,518 16,200 9,803
Amortized to expense during the year (16,728) (14,932) (9,670)
------------- ------------- -------------
Balance, end of year $ 4,536 $ 5,746 $ 4,478
============= ============= =============
</TABLE>
F-28
<PAGE> 59
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REINSURANCE
In the ordinary course of business, Century assumes and cedes reinsurance
with other insurers and reinsurers. These arrangements provide Century
with a greater diversification of business and generally limit the
maximum net loss potential on large risks. Although the ceding of
reinsurance does not discharge an insurer from its primary legal
liability to a policyholder, the reinsuring company assumes the related
liability. Excess of loss reinsurance contracts in effect through
December 31, 1999 generally protect individual property losses over
$200,000 and casualty losses over $200,000. Additionally, most contract
surety business is reinsured on a 92.5% quota share basis of the first
$500,000 in losses. Workers compensation business is 100% ceded on a
quota share basis to reinsurers. Catastrophe coverage is also maintained.
The impact of reinsurance is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Premiums written:
Direct $ 69,507 $ 54,458 $ 47,488
Assumed 12,278 28,475 12,263
Ceded (41,240) (34,836) (22,263)
------------- ------------- -------------
Net $ 40,545 $ 48,097 $ 37,488
============= ============= =============
Premiums earned:
Direct $ 63,873 $ 53,127 $ 48,085
Assumed 19,289 23,226 7,647
Ceded (39,446) (31,457) (18,494)
------------- ------------- -------------
Net $ 43,716 $ 44,896 $ 37,238
============= ============= =============
Losses and loss expense incurred:
Direct $ 44,120 $ 24,066 $ 20,135
Assumed 17,920 18,056 2,820
Ceded (33,396) (18,408) (2,273)
------------- ------------- -------------
Net $ 28,644 $ 23,714 $ 20,682
============= ============= =============
</TABLE>
The reinsurance payables were $16,766,500 and $10,285,000 at December 31, 1999
and 1998, respectively.
Reinsurance recoverables were comprised of the following as of December 31,
1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Recoverables on unpaid losses and loss expenses $ 34,964 $ 16,438 $ 8,256
Receivables on ceding commissions and other 3,817 5,365 5,851
Receivables on paid losses and expenses 5,524 2,115 1,108
------------- ------------- -------------
$ 44,305 $ 23,918 $ 15,215
============= ============= =============
</TABLE>
Century evaluates the financial condition of its reinsurers and establishes a
valuation allowance as reinsurance receivables are deemed uncollectible. During
1999, the majority of ceded amounts were ceded to General Insurance Company,
Continental Casualty Company, Republic Western Insurance Company, American
Reinsurance Company, Signet Star Reinsurance Company, and Underwriters
Reinsurance Company. Century monitors concentrations of risks arising from
similar geographic regions or activities to minimize its exposure to significant
losses from catastrophic events.
F-29
<PAGE> 60
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
LIABILITY FOR LOSSES AND LOSS EXPENSE PAYABLE
Activity in the liability for unpaid losses and loss expenses is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1 $ 60,994 $ 50,655 $ 41,099
Less: reinsurance recoverables, net (16,438) (8,256) (8,114)
------------ ------------ ------------
Net balance at January 1 44,556 42,399 32,985
------------ ------------ ------------
Incurred related to:
Current year 26,629 26,742 21,839
Prior years 2,015 (3,028) (1,157)
------------ ------------ ------------
Total incurred 28,644 23,714 20,682
------------ ------------ ------------
Paid related to:
Current year 8,773 7,918 2,468
Prior years 14,871 13,639 8,800
------------ ------------ ------------
Total paid 23,644 21,557 11,268
------------ ------------ ------------
Net balance at December 31 49,556 44,556 42,399
Plus: reinsurance recoverables, net 34,964 16,438 8,256
------------ ------------ ------------
Balance at December 31 $ 84,520 $ 60,994 $ 50,655
============ ============ ============
</TABLE>
Century experienced higher than anticipated ultimate losses on prior year.
Century's environmental exposure from continuing operations relates primarily to
its coverage of remediation related risks, thus management believes Century's
exposure to historic pollution situations is minimal.
Ohio law limits the payment of dividends by an insurance company to its parent.
The maximum dividend that may be paid without prior approval of the Director of
Insurance is limited to the greater of the statutory net income of the preceding
calendar year or 10% of total statutory surplus as of the prior December 31.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP). Century's insurance
subsidiaries file annual financial statements with the Ohio Department of
Insurance and are prepared on the basis of accounting practices prescribed by
such regulatory authorities, which differ from GAAP. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not prescribed. All material
transactions recorded by Century's insurance subsidiaries are in accordance with
prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based Capital
(RBC) formula. This model act requires every property and casualty insurer to
calculate its total adjusted capital and RBC requirement, and provides for an
insurance commissioner to intervene if the insurer experiences financial
difficulty. The model act became law in Ohio in March 1996, states where certain
subsidiaries of Century are domiciled. The RBC formula includes components for
asset risk, liability risk, interest rate exposure and other factors. Century's
insurance subsidiaries exceeded all required RBC levels as of December 31, 1999
and 1998.
The CSC Group's statutory net income for the three years ended December 31,
1999, 1998 and 1997, was approximately $554,000, $4,889,000, and $6,803,000,
respectively. The statutory capital and surplus as of December 31, 1999 and 1998
was approximately $29,512,000 and $32,553,000, respectively.
F-30
<PAGE> 61
CENTURY BUSINESS SERVICES, INC.
SCHEDULE I - SUMMARY OF INVESTMENT - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- - ------------------------------------------------------------------- ----------- ------------ ------------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE NOTES
- - ------------------------------------------------------------------- ----------- ------------ -------------
<S> <C> <C> <C>
Fixed maturities - held in maturity:
Bonds:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies ............................ $ 5,588 $ 5,439 $ 5,588
Corporate securities ................................. 308 308 308
Fixed maturities - available for sale:
Bonds:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies ............................ 4,192 4,160 4,160
Corporate securities ................................. 19,744 18,274 18,274
Municipal bonds ...................................... 21,082 20,354 20,354
Mortgage-backed securities ........................... 16,473 15,503 15,503
Other-assets backed securities ....................... 11,308 10,875 10,875
------- ------- -------
Total fixed maturities .......................... 78,695 74,913 75,062
------- ------- -------
Equity securities:
Common Stock:
Industrial, and other ................................ 405 314 314
Nonredeemable preferred stocks ........................... 5,498 5,244 5,244
------- ------- -------
Total equity securities ......................... 5,903 5,558 5,558
------- ------- -------
Short-term investments ................................... 5,713 5,713 5,713
------- ------- -------
Total investments ............................... 90,311 86,184 86,333
======= ======= =======
</TABLE>
F-31
<PAGE> 62
CENTURY BUSINESS SERVICES, INC.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ---------------------------------- -------------- --------------- ------------- -------------- --------------
FUTURE POLICY
DEFERRED BENEFITS, OTHER POLICY
POLICY LOSSES CLAIM CLAIMS AND
ACQUISITION AND LOSSES UNEARNED BENEFITS PREMIUM
SEGMENT COST EXPENSE PREMIUMS PAYABLES REVENUE
- - ---------------------------------- -------------- --------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended:
December 31, 1999........ $4,536 $84,520 $27,860 N/A $43,716
December 31, 1998........ 5,746 60,994 29,236 N/A 44,896
December 31, 1997........ 4,478 50,655 22,656 N/A 37,238
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------------- --------------- ------------- -------------- --------------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER DIRECT
INVESTMENT LOSSES AND ACQUISITION OPERATING PREMIUMS
INCOME LOSS EXPENSE COSTS EXPENSES WRITTEN
-------------- --------------- ------------- -------------- --------------
Year Ended:
December 31, 1999........ $5,037 $28,644 $16,728 $7,810 $69,507
December 31, 1998........ 5,381 23,714 14,932 5,286 54,458
December 31, 1997........ 4,524 20,682 9,670 2,331 47,488
</TABLE>
F-32
<PAGE> 63
CENTURY BUSINESS SERVICES, INC.
SCHEDULE IV- REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - ---------------------------------------- --------------- --------------- -------------- -------------- ---------------
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
OTHER OTHER ASSUMED
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
--------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Property - Casualty Earned Premiums......... $63,873 $39,446 $19,289 $43,716 44.12%
Year Ended December 31, 1998
Property - Casualty Earned Premiums......... 53,127 31,457 23,226 44,896 51.73%
Year Ended December 31, 1997
Property - Casualty Earned Premiums......... 48,085 18,494 7,647 37,238 20.54%
</TABLE>
F-33
<PAGE> 1
Exhibit 10.2
FIRST AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as
of March 24, 2000 (this "AGREEMENT"), is by and among CENTURY BUSINESS SERVICES,
INC., a Delaware corporation (the "Company"), the Lenders party to the Credit
Agreement referred to below (the "LENDERS"), BANK OF AMERICA, N.A. as agent (the
"AGENT"), and BANKBOSTON, N.A., BANK ONE, MICHIGAN, LASALLE BANK NATIONAL
ASSOCIATION AND PNC BANK, NATIONAL ASSOCIATION, each as Co-Agent (the
"CO-AGENTS").
RECITALS:
WHEREAS, the Company, Agent, Co-Agents and the Lenders are parties to
that certain Amended and Restated Credit Agreement dated as of October 3, 1997,
as amended and restated as of August 10, 1998 and as amended and restated as of
August 24, 1999 (as amended, restated, supplemented or otherwise modified and in
effect from time to time, the "CREDIT AGREEMENT"); and
WHEREAS, the Company, Agent, Co-Agents and the Lenders wish to amend
the Credit Agreement in certain respects as set forth herein, subject to the
terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
SECTION 1. DEFINED TERMS. Unless otherwise defined herein, all
capitalized terms used herein shall have the meanings given them in the Credit
Agreement.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is, as
of the Effective Date (as defined below), hereby amended as follows:
(a) THE DEFINITIONS OF "APPLICABLE MARGIN," "CHANGE OF CONTROL,"
"COLLATERAL DOCUMENTS," "EBIT," "EBITDA" AND "PERMITTED ACQUISITION THRESHOLD"
IN ARTICLE I OF THE CREDIT AGREEMENT ARE EACH HEREBY AMENDED BY DELETING SAID
DEFINITIONS IN THEIR ENTIRETY AND INSERTING THE FOLLOWING IN LIEU THEREOF:
<PAGE> 2
"APPLICABLE MARGIN" shall mean on any date the applicable
percentage set forth below based upon the Level as shown in the
Compliance Certificate then most recently delivered to the Lenders:
<TABLE>
<CAPTION>
Revolving Loans Letters of Credit
Base Offshore Commitment
Level Rate Rate Non-Financial Financial Fee
----- ---- ----------- ------------- --------- ----
<S> <C> <C> <C> <C> <C>
I 1.000% 2.000% 1.125% 2.000% .45%
II .750% 1.750% 1.000% 1.750% .40%
III .500% 1.500% .875% 1.500% .35%
IV .250% 1.250% .750% 1.250% .30%
</TABLE>
; PROVIDED HOWEVER that, if the Company shall have failed to deliver to
the Lenders by the date required hereunder any Compliance Certificate
pursuant to SECTION 7.02(b), then from the date such Compliance
Certificate was required to be delivered until the date of such
delivery the Applicable Margin shall be deemed to be Level I. Each
change in the Applicable Margin shall take effect with respect to all
outstanding Loans on the third Business Day immediately succeeding the
day on which such Compliance Certificate is received by the Agent;
PROVIDED, HOWEVER, that with respect to the period from January 1, 2000
until the third Business Day immediately succeeding the day on which
the Compliance Certificate with respect to the fiscal quarter ended
March 31, 2000 is received by the Agent, the Applicable Margin shall be
determined by reference to the Compliance Certificate delivered to the
Agent with respect to the fiscal year ended December 31, 1999.
Notwithstanding the foregoing, no reduction in the Applicable Margin
shall be effected if a Default or an Event of Default shall have
occurred and be continuing on the date when such change would otherwise
occur, it being understood that on the third Business Day immediately
succeeding the day on which such Default or Event of Default is either
waived or cured (assuming no other Default or Event of Default shall be
then pending), the Applicable Margin shall be reduced (on a prospective
basis) in accordance with the then most recently delivered Compliance
Certificate.
"CHANGE OF CONTROL" means (a) any Person or any two or more
Persons (in each case other than a Person that is a stockholder of the
Company as of the date of this Agreement) acting in concert acquiring
beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Exchange Act), directly or
indirectly, of capital stock of the Company (or other securities
convertible into such capital stock) representing 25% or more of the
combined voting power of all capital stock of the Company entitled to
vote in the election of directors, other than capital stock having such
power only by reason of the happening of a contingency, or (b) during
any period of twelve consecutive calendar months, individuals who at
the beginning of such period constituted the Company's board of
directors (together with any new directors whose election by the
Company's board of directors or whose nomination for election by the
Company's stockholders was approved by a vote of at least a majority of
the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reasons other than death or
disability to constitute a majority of the directors then in office, or
(c) during any period of twelve consecutive calendar months (other than
pursuant to a
-2-
<PAGE> 3
disposition permitted pursuant to SECTION 8.02), the ceasing of more
than 25% of the individuals who hold an office possessing the title
Senior Vice President or Executive Vice President or such title that
ranks senior thereto of the Company or the Company's direct Subsidiaries
(collectively, "SENIOR MANAGEMENT"), on the first day of each such
period to be part of the Senior Management of the Company and its
Subsidiaries taken as a whole.
"COLLATERAL DOCUMENTS" means, collectively, (a) the Guaranty,
the Pledge Agreements, the Security Agreement and other similar
agreements between the Company or its Subsidiaries and the Lenders or
the Collateral Agent for the benefit of the Lenders now or hereafter
delivered to the Lenders or the Collateral Agent pursuant to or in
connection with the transactions contemplated hereby and (b) any
amendments, supplements, modifications, renewals, replacements,
consolidations, substitutions and extensions of any of the foregoing.
"EBIT" means, for any period, for the Company and its
Subsidiaries on a consolidated basis, determined in accordance with
GAAP, the sum of (a) Net Income (or net loss) for such period PLUS (b)
all amounts treated as expenses for interest to the extent included in
the determination of such Net Income (or loss), PLUS (c) all accrued
taxes on or measured by income to the extent included in the
determination of such Net Income (or loss); PROVIDED, HOWEVER, that Net
Income (or loss) shall be computed for these purposes without giving
effect to extraordinary losses or extraordinary gains.
"EBITDA" means, for any period, for the Company and its
Subsidiaries on a consolidated basis, determined in accordance with
GAAP, the sum of (a) the Net Income (or net loss) for such period PLUS
(b) all amounts treated as expenses for depreciation and interest and
the amortization of intangibles of any kind to the extent included in
the determination of such Net Income (or loss), PLUS (c) all accrued
taxes on or measured by income to the extent included in the
determination of such net income (or loss); PROVIDED, HOWEVER, that net
income (or loss) shall be computed for these purposes without giving
effect to extraordinary losses or extraordinary gains.
"PERMITTED ACQUISITION THRESHOLD" means either (a) the total
consideration to be paid by the Company or any of its Subsidiaries in
connection with an Acquisition (as determined by the Company) is equal
to or in excess of $20,000,000 or (b) the total cash consideration to
be paid by the Company or any of its Subsidiaries in connection with an
Acquisition is equal to or in excess of $7,500,000.
(b) ARTICLE I OF THE CREDIT AGREEMENT IS AMENDED BY INSERTING
THE FOLLOWING DEFINITION IN ALPHABETICAL ORDER:
"SECURITY AGREEMENT" means the Security Agreement among the
Company, the Guarantors and the Agent.
(c) ARTICLE II OF THE CREDIT AGREEMENT IS HEREBY AMENDED BY (i)
REDESIGNATING CLAUSE (b) OF SECTION 2.07 AS CLAUSE (c) AND (ii) ADDING THE
FOLLOWING NEW CLAUSE (b) TO SECTION 2.07:
-3-
<PAGE> 4
"(b) On the date of receipt thereof by the Company or
any of its Subsidiaries, an amount equal to 100% of the net
proceeds received by any such Person from the sale or other
disposition of an Insurance Subsidiary (including any sale of
any asset of an Insurance Subsidiary) shall be applied to
repay the then outstanding Revolving Loans.".
(d) ARTICLE VI OF THE CREDIT AGREEMENT IS HEREBY AMENDED BY
DELETING SECTION 6.13 IN ITS ENTIRETY AND INSERTING THE FOLLOWING IN LIEU
THEREOF:
"6.13 COLLATERAL DOCUMENTS
(a) The provisions of each Pledge Agreement are
effective to create, in favor of the Collateral Agent for the
benefit of the Lenders, a legal, valid and enforceable first
priority security interest in all of the collateral described
therein; and the Pledged Collateral was delivered to the
Collateral Agent or its nominee in accordance with the terms
thereof. The Lien of each Pledge Agreement constitutes a
perfected, first priority security interest in all right,
title and interest of the Company or such Subsidiary, as the
case may be, in the Collateral described therein, prior and
superior to all other Liens and interests.
(b) The provisions of each of the Collateral
Documents are effective to create in favor of the Collateral
Agent for the benefit of the Lenders, a legal, valid and
enforceable first priority security interest in all right,
title and interest of the Company and its Subsidiaries in the
collateral described therein, subject only to any Permitted
Liens. The chief executive office and the principal books and
records of the Company and each Guarantor will be located at
its address set forth on SCHEDULE A to the Security Agreement,
and when financing statements have been filed in the
appropriate offices in the jurisdictions corresponding to such
locations and when such other actions as are each described in
each of the Collateral Documents, each of the Collateral
Documents shall constitute a perfected security interest in
all right, title and interest of such Person, as the case may
be, in the Collateral described therein, and except for
Permitted Liens existing on the Closing Date and whose
priority cannot be superseded by the provisions hereof or of
any Collateral Document and filings hereunder or thereunder, a
perfected first lien on, and security interest in, all right,
title and interest of such Person, as the case may be, in the
Collateral described in each Collateral Document.
(c) All representations and warranties of the Company
and any of its Subsidiaries party thereto contained in the
Collateral Documents are true and correct.".
(e) ARTICLE VII OF THE CREDIT AGREEMENT IS HEREBY
AMENDED BY (i) REDESIGNATING CLAUSE (f) OF SECTION 7.02 AS CLAUSE (g) AND (ii)
ADDING THE FOLLOWING NEW CLAUSE (f) TO SECTION 7.02:
-4-
<PAGE> 5
"(f) ACCOUNT RECEIVABLE AGING REPORT. Within
forty-five (45) days after the end of each fiscal quarter
(commencing with the fiscal quarter ended March 31, 2000), an
account receivable aging report (the "Account Receivable Aging
Report") of the Company by segment as defined in the Company's
Form 10-K for the fiscal year ended December 31, 1999. Each
Account Receivable Aging Report shall include such detail as
the Agent may reasonably require and shall be signed by the
president or the chief financial officer or treasurer of the
Company; and".
(f) ARTICLE VIII OF THE CREDIT AGREEMENT IS HEREBY AMENDED BY
(x) DELETING SECTION 8.15 IN ITS ENTIRETY AND INSERTING THE FOLLOWING IN LIEU
THEREOF:
"8.15 MINIMUM NET WORTH. The Company shall not permit
its Consolidated Net Worth at any time (a) for the period from
and including the Closing Date to but excluding the last day of
the fiscal quarter ended on December 31, 1999, to be less than
$510,000,000, and (b) for the period from and including the last
day of the fiscal quarter ended on December 31, 1999 and
thereafter, to be less than an amount equal to the sum of (x)
$510,000,000 PLUS (y) 70% of the Company's positive Net Income,
if any, for each such fiscal quarter plus (2) an amount equal to
100% of the net cash and non-cash proceeds of any equity
securities issued by the Company after the date of this
Agreement."; and
(x) DELETING SECTION 8.17 IN ITS ENTIRETY AND INSERTING
THE FOLLOWING IN LIEU THEREOF:
"8.17 INTEREST COVERAGE RATIO. The Company shall not
permit, at any time during a period listed below, its Interest
Coverage Ratio at such time for the twelve month period (taken as one
accounting period) last ended prior to the date of determination, to
be less than the ratio set forth below opposite the respective period
in which the determination is being made:
PERIOD RATIO
From and including 4.00:1.0
the last day of the
fiscal quarter ended
December 31, 1999
to but excluding the
last day of the fiscal
quarter ended on
December 31, 2000
-5-
<PAGE> 6
From and including 4.25:1.0
the last day of the
fiscal quarter ended on
December 31, 2000
to but excluding the
last day of the fiscal
quarter ended on
December 31, 2001
Thereafter 4.50:1.0
(g) SCHEDULE 2.01 OF THE CREDIT AGREEMENT IS AMENDED IN ITS
ENTIRETY TO READ AS SET FORTH ON EXHIBIT A HERETO.
SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AGREEMENT. This
Agreement shall become effective upon the date (the "EFFECTIVE DATE") each of
the following conditions have been satisfied:
(a) EXECUTION AND DELIVERY. The Company and the Majority Lenders
shall have executed and delivered this Agreement.
(b) NO DEFAULTS. No Default or Event of Default under the Credit
Agreement (as amended hereby) shall have occurred and be continuing.
(c) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Agreement, the Credit Agreement (as
amended hereby) and the other Loan Documents shall be true and correct in all
material respects as of the Effective Date, with the same effect as though made
on such date, except to the extent that any such representation or warranty
expressly refers to an earlier date, in which case such representation or
warranty shall be true and correct in all material respects as of such earlier
date.
(d) REDUCTION OF COMMITMENTS. The receipt by the Agent from the
Company of an irrevocable notice to the Agent to permanently reduce the
Commitments from $250,000,000 to $200,000,000 pursuant to SECTION 2.05 of the
Credit Agreement.
(e) AMENDMENT FEE. The receipt by the Agent from the Company of
an amendment fee in the amount of $5,000 per Lender executing this Amendment, to
be distributed by the Agent to such Lenders.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants (i) that it has full
power and authority to enter into this Agreement and perform its obligations
hereunder in accordance with the provisions hereof, (ii) that this Agreement has
been duly authorized, executed and delivered by such party and (iii) that this
Agreement constitutes the legal, valid and binding obligation of such party,
enforceable against such party in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or limiting creditors' rights generally
and by general principles of equity.
-6-
<PAGE> 7
(b) The Company represents and warrants that the following
statements are true and correct:
(i) The representations and warranties contained in the
Credit Agreement and each of the other Loan Documents are and
will be true and correct in all material respects on and as of
the Effective Date to the same extent as though made on and as
of that date, except to the extent such representations and
warranties expressly refer to an earlier date, in which case
they were true and correct in all material respects on and as of
such earlier date.
(ii) No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by
this Agreement that would constitute an Event of Default.
(iii) The execution, delivery and performance of this
Agreement by the Company do not and will not violate its
respective certificate or articles of incorporation or by-laws,
any law, rule, regulation, order, writ, judgment, decree or
award applicable to it or any contractual provision to which it
is a party or to which it or any of its property is subject.
(iv) No authorization or approval or other action by,
and no notice to or filing or registration with, any
governmental authority or regulatory body is required in
connection with its execution, delivery and performance of this
Agreement and all agreements, documents and instruments executed
and delivered pursuant to this Agreement.
SECTION 5. SECURITY AGREEMENT; FURTHER ASSURANCES.
(a) The Company and each Guarantor shall enter into a security
agreement, substantially in the form attached hereto as Exhibit B, within 30
days (or such other time period as is deemed necessary by the Agent in light of
the surrounding circumstances) of the Effective Date.
(b) Promptly upon request by the Agent or the Majority Lenders,
the Company and each Guarantor shall (and shall cause any of its Subsidiaries
to) do, execute, acknowledge, deliver, record, re-record, file, re-file,
register and re-register, any and all such further acts, deeds, conveyances,
security agreements, mortgages, assignments, estoppel certificates, financing
statements and continuations thereof, termination statements, notices of
assignment, transfers, certificates, assurances and other instruments the Agent
or such Lenders, as the case may be, may reasonably require from time to time in
order (i) to carry out more effectively the purposes of this Agreement or any
other Loan Document, (ii) to subject to the Liens created by any of the
Collateral Documents any of the properties, rights or interests covered by any
of the Collateral Documents, (iii) to perfect and maintain the validity,
effectiveness and priority of any of the Collateral Documents and the Liens
intended to be created thereby, and (iv) to better assure, convey, grant,
assign, transfer, preserve, protect and confirm to the Agent and Lenders the
rights granted or now or hereafter intended to be granted to
-7-
<PAGE> 8
the Lenders under any Loan Document or under any other document executed in
connection therewith.
SECTION 6. REFERENCES TO AND EFFECT ON THE CREDIT AGREEMENT.
(a) On and after the Effective Date each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like
import, and each reference to the Credit Agreement in the Loan Documents and all
other documents (the "ANCILLARY DOCUMENTS") delivered in connection with the
Credit Agreement shall mean and be a reference to the Credit Agreement as
amended hereby.
(b) Except as specifically amended above, the Credit Agreement,
the Loan Documents and all other Ancillary Documents shall remain in full force
and effect and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver (except as
specifically waived above) of any right, power or remedy of the Lenders, the
Co-Agents or the Agents under the Credit Agreement, the Loan Documents or the
Ancillary Documents.
SECTION 7. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument. Delivery of an executed counterpart of a signature page of this
Agreement by facsimile transmission shall be effective as delivery of a manually
executed counterpart of this Agreement.
SECTION 8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO THE INTERNAL CONFLICTS OF LAWS PROVISIONS THEREOF.
SECTION 9. HEADINGS. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purposes.
[signature pages to follow]
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized as of the
date above first written.
/s/CENTURY BUSINESS SERVICES, INC.
/s/BANK OF AMERICA, N.A., as Agent
/s/BANK OF AMERICA, N.A., Individually as
a Lender and as the Issuing Bank
/s/BANKBOSTON, NA, as a Co-Agent and
individually as a Lender
/s/BANK ONE, MICHIGAN, as a Co-Agent and
individually as a Lender
/s/LASALLE BANK NATIONAL ASSOCIATION, as a
Co-Agent and individually as a Lender
/s/PNC BANK, NATIONAL ASSOCIATION, as a
Co-Agent and individually as a Lender
/s/COMERICA BANK
/s/FIFTH THIRD BANK, NORTHEASTERN OHIO
/s/HUNTINGTON NATIONAL BANK
/s/FIRSTAR BANK, N.A.
/s/FIRSTMERIT BANK, N.A.
/s/FIRST UNION NATIONAL BANK
/s/U.S. BANK, N.A.
S-1
<PAGE> 10
EXHIBIT A
---------
SCHEDULE 2.01
-------------
REVOLVING LOAN COMMITMENTS
--------------------------
AND PRO RATA SHARES
-------------------
Revolving Loan Pro Rata
Lender Commitment Share
------ ---------- -----
Bank of America, N.A. $ 26,400,000 13.20%
BankBoston, NA 19,200,000 9.60%
Bank One, Michigan 19,200,000 9.60%
LaSalle Bank National Association 19,200,000 9.60%
PNC Bank, National Association 19,200,000 9.60%
Comerica Bank 15,200,000 7.60%
Fifth Third Bank, Northeastern Ohio 15,200,000 7.60%
Huntington National Bank 15,200,000 7.60%
Firstar Bank 15,200,000 7.60%
FirstMerit Bank, N.A. 12,000,000 6.00%
First Union National Bank 12,000,000 6.00%
U.S. Bank, N.A. 12,000,000 6.00%
------------ ------
TOTAL: $200,000,000 100%
============ ====
S-2
<PAGE> 1
Exhibit 21.1
SUBSIDIARY COMPANIES OF CENTURY BUSINESS SERVICES, INC.
AS OF 12/31/99
1. AH Business Services, Inc. (Ohio)
2. American Inspection and Audit Services, Inc. (Ohio)
3. Automation Experts Business Services, Inc. (Ohio)
4. B & S Business Services, Inc. (Ohio
5. BA Business Services, Inc. (Ohio)
6. Bass Consultants of Ohio, Inc. (Ohio)
7. BBGPR, LLC (Texas)
8. BCC Business Services, Inc. (Ohio)
9. Beatty Satchell Business Services, Inc. (Maryland)
10. Benmark Business Services, Inc. (Georgia)
11. BMS Employee Benefits, Inc. (Virginia)
12. Broker Benefit Consultants Business Services, Inc. (Ohio)
13. Business Valuation Services, Inc. (Ohio)
14. BVKT Business Services, Inc. (Ohio)
15. CBI Business Services, Inc. (Ohio)
16. CBIZ Benefits & Insurance Services, Inc. (Missouri)
17. CBIZ Benefits & Insurance Services of Maryland, Inc. (Maryland)
18. ZA Business Services, Inc. n/k/a CBIZ Business Solutions, Inc. (Ohio)
19. David & Samson Business Services, Inc. n/k/a CBIZ Business Solutions,
Inc. (Virginia)
20. CBIZ e-Solutions, Inc. (Ontario, Canada)
21. CBIZ Property Tax Solutions, Inc. (Ohio)
22. CBIZ Retirement Services, Inc. (Ohio)
23. CBIZ Technologies, Inc. (Ohio)
24. CBIZ Valuation, Inc. (Ohio)
25. CBIZ Vine Street Holding Corp. (Ohio)
26. CBSI Management Co. (Ohio)
27. Century Agency Management Group, Inc. (Ohio)
28. Century Capital Group, Inc. (Ohio)
29. Century Payroll Solutions, Inc. (Ohio)
30. Century Retirement & Wealth Management Services, Inc. (Ohio)
31. Century Risk Services Company (Ohio)
32. Century Small Business Solutions, Inc. (Ohio)
33. Century Surety Company (Ohio)
34. Century Surety Services Group, Inc. (Ohio)
35. Century Surety Underwriters, Inc. (Indiana)
36. CKS Business Services, Inc. (Ohio)
37. CMG Consulting, Inc. (Ohio)
38. Commercial Surety Agency, Inc. d.b.a. Century Surety Underwriters
(Ohio)
39. Competitive Technologies Business Services, Inc.(Ohio)
40. Connecticut Escrow, Inc. (Ohio)
41. Conrad Business Services, Inc. (Ohio)
42. Continental Heritage Insurance Company (Ohio)
43. Continuous Learning Group, Inc (Ohio)
44. Contract Operations Planning, Incorporated (Ohio)
45. Contract Surety Reinsurance Corp. (Ohio)
1
<PAGE> 2
46. Cornerstone Broker Insurance Services Agency, Ltd. (Ohio)
47. CSC Insurance Agency, Inc. (Ohio)
48. Devon Tax Group, LLC (CA)
49. DP & Co. Business Services, Inc. (Ohio)
50. Duitch, Franklin Business Services, Inc. (Ohio)
51. EDG Business Services, Inc. (Ohio)
52. Employers Select Plan Agency of Ohio, Inc. (Ohio)
53. Envision Development Group, Inc. (Ohio)
54. ERIC Agency, Inc. (Colorado)
55. Evergreen National Indemnity Company (Ohio)
56. FPG Business Services, Inc. (Ohio)
57. Funds Administration Services, Inc. (Ohio)
58. G&C Business Services, Inc. (Ohio)
59. Gibraltar Real Estate Services Corporation (Illinois)
60. Gordon, Zucarelli & Handley Business Services, Inc. (Ohio)
61. Health Administration Services, Inc. (Ohio)
62. HHMR&S Business Services, Inc. (Ohio)
63. Highwood Associates, Inc. (Illinois)
64. HK Business Services, Inc. (Ohio)
65. Hunt & Associates Business Services, Inc. (Ohio)
66. Information Technology Advisors and Consultants, Inc. (Ohio)
67. JF Consulting Services, Inc. (Ohio)
68. Jones, Hayward, & Lenzi Business Services, Inc. (Ohio)
69. KA Consulting Services, Inc. (Ohio)
70. Karling Health Care Consulting, Inc. (Ohio)
71. Kaufman Davis Business Services, Inc. (Ohio)
72. Kessler & Associates Business Services, Inc. (Ohio)
73. Lake Business Services, Inc. (Ohio)
74. Love Insurance Agency, Inc. (Ohio)
75. M. T. Donahoe and Associates, Inc. (Ohio)
76. Managed Care Solutions, Inc. (Illinois)
77. Marvel Consultants, Inc. (Ohio)
78. McClain & Company Business Services, Inc. (Ohio)
79. Medical Management Professionals, Inc. (Ohio)
80. MHM Business Services, Inc. (Ohio)
81. Miller, Wagner Business Services, Inc. (Ohio)
82. Millisor Firm Co., Inc. (Ohio)
83. Moore, Tyler & Company, Inc. (Ohio)
84. MRC Business Services, Inc. (Ohio)
85. MRP Business Solutions Group, Inc. (Ohio)
86. Multi-Dimensional International Consultants, Inc. (Ohio)
87. National Benefit Systems, Inc. (Arizona)
88. National Retirement Planning, Inc. (Pennsylvania)
89. Nemphos, Weber Business Services, Inc. (Ohio)
90. Next Risk Management, Inc. (Ohio)
91. Niederhoffer-Henkel & Company, Inc. (Ohio)
2
<PAGE> 3
92. Norman Barken Associates, Inc. (Ohio)
93. Parks Palmer Business Services, Inc. (Ohio)
94. PDA Business Services, Inc. (Ohio)
95. Philip-Rae Business Services, Inc. (Ohio)
96. Posse Walsh Buckman Van Buren Business Services, Inc. (Delaware)
97. Riggleman, Smyth & Associates Business Services, Inc (Ohio)
98. Rootberg Business Services, Inc. (Ohio)
99. Rosemont Business Services, Inc. (California)
100. Ross Gordon & Associates, Inc. (California)
101. RRSS & Company Business Services, Inc. (Ohio)
102. RS&A Business Services, Inc. (Colorado)
103. S & B Business Services, Inc.(Ohio)
104. S&L Business Services, Inc. (Georgia)
105. S&S Business Services, Inc. (Ohio)
106. Shilling & Kenyon/SK Consulting, Inc. (Ohio)
107. SK&B Business Services, Inc. (Ohio)
108. SKB Business Services, Inc. (Ohio)
109. SLP Business Services, Inc. (Ohio)
110. SLW Business Services, Inc. (Ohio)
111. SMR & Co. Business Services (Ohio)
112. Southern Ohio Benefits Agency, Inc. (Ohio)
113. SR Business Services, Inc. (Ohio)
114. SRTDA Business Services, Inc. (Ohio)
115. St. James General Agency, Inc. (Texas)
116. STRZ Business Services, Inc. (Ohio)
117. Surety Associates II, Inc. (Connecticut)
118. Sustman Business Services, Inc. (Texas)
119. Tanker & Associates, Inc. (Ohio)
120. TBG Investment Advisors Agency, Inc. (Ohio)
121. TC Business Services, Inc. (Ohio)
122. The Benefits Group Agency, Inc. (Ohio)
123. The Weiss Group, Inc. (Ohio)
124. Trilogy Associates, Inc. (Ohio)
125. Tri-Tek Business Services, Inc. (Ohio)
126. Varney Business Services, Inc. (Ohio)
127. WC&M Business Services, Inc. (Ohio)
128. Wolf & Cohen Business Services, Inc. (Ohio)
3
<PAGE> 1
Exhibit 23
The Board of Directors
Century Business Services, Inc.:
We consent to incorporation by reference in the Registration Statements Nos.
333-35049 and 333-98382 on Form S-8; Nos. 333-46687, 333-64109, 333-76179 and
333-90749 on Form S-3; Nos. 333-15413, 333-27825 and 333-40331 on Form S-3 as
amended; and Nos. 333-40313 and 333-81039 on Form S-4 as amended of Century
Business Services, Inc. and Subsidiaries of our report dated February 29, 2000,
except for paragraph 2 of note 13, which is as of March 24, 2000, relating to
the consolidated balance sheets of Century Business Services, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999, and all related schedules,
which report appears in the December 31, 1999 annual report on Form 10-K of
Century Business Services, Inc. and Subsidiaries.
/s/ KPMG LLP
Cleveland, Ohio
March 29, 2000
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<NAME> CENTURY BUSINESS SERVICES, INC.
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 66,152
<SECURITIES> 0
<RECEIVABLES> 201,631
<ALLOWANCES> 13,272
<INVENTORY> 0
<CURRENT-ASSETS> 332,281
<PP&E> 77,940
<DEPRECIATION> 21,792
<TOTAL-ASSETS> 787,343
<CURRENT-LIABILITIES> 98,595
<BONDS> 0
0
0
<COMMON> 933
<OTHER-SE> 512,199
<TOTAL-LIABILITY-AND-EQUITY> 787,343
<SALES> 0
<TOTAL-REVENUES> 546,393
<CGS> 0
<TOTAL-COSTS> 461,118
<OTHER-EXPENSES> 52,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,602
<INCOME-PRETAX> 25,879
<INCOME-TAX> 14,449
<INCOME-CONTINUING> 11,430
<DISCONTINUED> (3,987)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,443
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