<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to
------------------------- -------------------
Commission file number 0-25890
--------------------------------------------------------
CENTURY BUSINESS SERVICES, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2769024
- ------------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6480 Rockside Woods Boulevard South, Suite 330, Cleveland, Ohio 44131
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
------------------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
-------- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Outstanding at
Class of Common Stock April 30, 2000
--------------------- --------------
<S> <C>
Par value $.01 per share 95,423,629
----------
</TABLE>
Exhibit Index is on page 15 of this report.
1
<PAGE> 2
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: Page
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 5
Notes to the Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-12
Item 3. Quantitative and Qualitative Information about Market Risk 12
PART II . OTHER INFORMATION :
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
Exhibit Index 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
March 31, DECEMBER 31,
2000 1999
-------------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 40,334 $ 48,906
Restricted cash 15,841 17,246
Accounts receivable, less allowance for doubtful
accounts of $13,997 and $13,272 219,976 188,359
Notes receivable - current 2,869 3,209
Income taxes recoverable 4,789 14,835
Deferred tax asset 9,521 9,912
Other current assets 10,725 13,001
Net assets of discontinued operations 35,523 36,813
-------------- -------------
Total current assets 339,578 332,281
Goodwill, net of accumulated amortization of
$25,466 and $18,527 374,725 379,922
Fixed assets, net of accumulated depreciation of
$24,571 and $21,792 60,919 56,148
Notes receivable - non-current 6,121 4,856
Other assets 18,485 14,136
-------------- -------------
TOTAL ASSETS $ 799,828 $ 787,343
============== =============
LIABILITIES
Accounts payable $ 36,031 $ 41,228
Notes payable and capitalized leases - current 11,600 6,534
Accrued expenses 45,860 50,833
-------------- -------------
Total current liabilities 93,491 98,595
Bank debt 158,500 144,000
Notes payable and capitalized leases - long term 1,348 1,345
Deferred tax liability 11,396 11,968
Accrued expenses 16,988 18,303
-------------- -------------
TOTAL LIABILITIES 281,723 274,211
-------------- -------------
STOCKHOLDERS' EQUITY
Common stock 933 933
Additional paid-in capital 438,788 443,052
Retained earnings 83,467 74,170
Unearned ESOP (1,795) (1,795)
Treasury stock (754) (754)
Accumulated other comprehensive loss (2,534) (2,474)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 518,105 513,132
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 799,828 $ 787,343
============== =============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
MARCH 31,
2000 1999
--------------- -----------------
<S> <C> <C>
Revenue $ 172,120 $ 138,372
Expenses:
Operating 129,418 104,630
Corporate general and administrative 8,519 3,100
Merger-related -- 1,518
Depreciation and amortization 10,764 4,383
Interest expense 2,695 1,297
Other income, net (902) (1,384)
--------------- -----------------
Total expenses 150,494 113,544
Income from continuing operations before
income tax expense 21,626 24,828
Income tax expense 11,246 9,636
--------------- -----------------
Income from continuing operations 10,380 15,192
Income from operations of discontinued business,
net of tax 5 706
Loss on disposal of discontinued business, net of tax (1,088) -
--------------- -----------------
Net income $ 9,297 $ 15,898
=============== =================
Earnings (loss) per share:
Basic:
Continuing operations $ 0.11 $ 0.19
Discontinued operations (0.01) 0.01
--------------- -----------------
Net income $ 0.10 $ 0.20
=============== =================
Diluted:
Continuing operations $ 0.11 $ 0.17
Discontinued operations (0.01) 0.01
--------------- -----------------
Net income $ 0.10 $ 0.18
=============== =================
Pro forma income data (from continuing operations)
Net income as reported $ 10,380 $ 15,192
Pro forma adjustment for income tax expense - 368
--------------- -----------------
Pro forma net income $ 10,380 $ 14,824
=============== =================
Pro forma earnings per share:
Basic $ 0.11 $ 0.18
=============== =================
Diluted $ 0.11 $ 0.17
=============== =================
Weighted average common shares 93,218 80,732
=============== =================
Weighted average common shares and dilutive
potential common shares 94,516 88,199
=============== =================
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------------------
2000 1999
------------------ --------------------
<S> <C> <C>
NET CASH USED IN CONTINUING OPERATING ACTIVITIES $ (11,771) $ (6,930)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (additions to) notes receivable (925) 350
Business acquisitions, net of cash acquired (3,163) (8,055)
Purchases of property and equipment (8,940) (8,181)
Proceeds from dispositions of property and equipment 711 32
------------------ --------------------
Net cash used in investing activities (12,317) 15,854
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 35,200 42,000
Proceeds from notes payable 3,359 1,790
Payment of bank debt (20,700) (17,000)
Payment of notes payable and capitalized leases (2,360) (25,656)
Proceeds from stock issuances, net - 24,860
Proceeds from exercise of stock options and warrants, net 17 302
------------------ --------------------
Net cash provided by financing activities 15,516 26,296
------------------ --------------------
Net increase (decrease) in cash and cash equivalents (8,572) 3,512
Cash and cash equivalents at beginning of period 48,906 43,593
------------------ --------------------
Cash and cash equivalents at end of period $ 40,334 $ 47,105
================== ====================
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 6
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements reflect all adjustments
(consisting of only normal and recurring adjustments) necessary to
present fairly the financial position of Century Business Services,
Inc. and Subsidiaries ("Century") as of March 31, 2000 and December 31,
1999, and the results of their operations for the three-month periods
ended March 31, 2000 and 1999, and cash flows for the three-month
periods ended March 31, 2000 and 1999. The results of operations for
such interim periods are not necessarily indicative of the results for
the full year. The accompanying unaudited condensed consolidated
interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
reporting and with instructions to Form 10-Q and accordingly do not
include all disclosures required by generally accepted accounting
principles. The 1999 condensed consolidated balance sheet was derived
from Century's audited consolidated balance sheet which gives effect to
the planned divestiture of its specialty insurance segment, which is
being accounted for as a discontinued operation. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates. Certain reclassifications have been made to the 1999
financial statements to conform to the 2000 presentation.
2. ACQUISITIONS
During fiscal 1999, Century slowed its strategic acquisition program.
During the first quarter of 2000, Century purchased one business
solutions company, which was accounted for under the purchase method of
accounting. Accordingly, the operating results of the acquired company
have been included in the accompanying consolidated financial
statements since the date of acquisition. The aggregate purchase price
of this acquisition was approximately $0.9 million, which includes a
"holdback payment" of $0.1 million in cash based upon the receipt of
50% of the aggregate value of the accounts receivable purchased. The
excess of the purchase price over fair value of the net assets acquired
(goodwill) was approximately $0.6 million, and is being amortized over
a 15 year period. As a result of the nature of the assets and
liabilities of the business acquired,there were no material
identifiable intangible assets or liabilities. Future contingent
consideration is recorded as additional purchase price when
performance goals have been met.
3. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents consist of funds held on deposit and
short-term highly liquid investments with a maturity of three months or
less at the date of purchase. At various times during the year, Century
had deposits with financial institutions in excess of the $100,000
federally insured limit.
Restricted cash represents funds on deposit from clients for which the
Company is administering and settling claims. A related liability for
these funds is recorded in accrued expenses and other liabilities in
the balance sheet.
6
<PAGE> 7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
4. CONTINGENCIES
Century is involved in litigation, arising in the normal course of
business. While it cannot be predicted with certainty, management
believes that the outcome will not have a material adverse effect on
Century's financial condition or results of operations. See "Part II -
Other Information, Item 1. Legal Proceedings" for information regarding
proceedings initiated during the current period.
5. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", requires reporting the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the Balance Sheet.
Items considered other comprehensive income are the adjustments made
for unrealized holding gains and losses on available-for-sale
securities (primarily held by the discontinued operations) and foreign
currency translation adjustments. Comprehensive income for the three
months ended March 31, 2000 and 1999 was $9.2 million and $15.6
million, respectively.
6. EARNINGS PER SHARE
For the periods presented, Century presents both basic and diluted
earnings per share. The following data shows the amounts (in thousands)
used in computing earnings per share and the effect on the weighted
average number of dilutive potential common shares. Included in
potential dilutive common shares are contingent shares, which represent
shares issued and placed in escrow that will not be released until
certain performance goals have been met.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Denominator
Basic
Weighted average common
shares 93,218 80,732
---------------- ----------------
Diluted
Warrants 916 6,702
Options 113 267
Contingent shares 269 498
---------------- ----------------
Total 94,516 88,199
================ ================
</TABLE>
7
<PAGE> 8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
7. CONSOLIDATION AND INTEGRATION CHARGES
During the fourth quarter of fiscal 1999, Century's Board of Directors
approved a plan to consolidate several operations in multi-office
markets and integrate certain back-office functions into a
shared-services center. The plan included the consolidation of at least
60 office locations, the elimination of more than 200 positions
(including Corporate), and the divestiture of four small, non-core
businesses. Pursuant to the plan, Century recorded a consolidation and
integration pre-tax charge of $27.4 million, which included $4.8
million for severance and $9.4 million for obligations under various
noncancellable leases that were committed to prior plan approval,
for which no economic benefit to Century would be subsequently
realized.
As a result of executive management changes (including Century's
President and Chief Operating Officer) and certain strategic changes in
the first quarter of fiscal 2000, Century revisited the extent of its
planned integration and consolidation initiatives and extended the
timing of certain office consolidations beyond one year. Century's
Board of Directors approved the revision to the plan on March 31, 2000.
Accordingly, Century reduced approximately $4.4 million of accruals
originally provided for in the plan related to the aforementioned
noncancellable lease obligations. In addition, Century recorded, on a
pre-tax basis, net charges of $1.5 million for severance, and $1.3
million for shared-service and consolidation charges. Lastly, Century
recorded an additional write-down of $1.0 million (pre-tax) relating to
the divestiture of the four non-core businesses previously announced.
The net effect of the reduction of the lease obligation accrual and the
first-quarter 2000 consolidation and integration charges was a net
pre-tax credit of $643,000. Excluding the net effect of these unusual
expenses and credits, Century reported from continuing operations net
income and diluted earnings per share of $10.0 million and $0.11,
respectively, for the three-month period ended March 31, 2000.
Consolidation and integration reserve balances as of December 31, 1999,
activity during the three-month period ended March 31, 2000, and the
remaining reserve balances as of March 31, 2000, were as follows (in
thousands):
<TABLE>
<CAPTION>
Lease Severance
Consolidation(1) & Benefits(2)
------------- -----------
<S> <C> <C>
Reserve balance at December 31, 1999 $ 9,400 4,150
Amounts charged to income - 2,829
Amounts utilized - (789)
Amounts adjusted (4,379) (1,382)
---------- --------
Reserve balance at March 31, 2000 $ 5,021 4,808
========== ========
</TABLE>
(1) Amount designated as "adjusted" is included in operating expenses
in the accompanying condensed consolidated statement of income for the
three-month period ended March 31, 2000.
(2) Amounts designated as "charged to income" and "adjusted" are included
in corporate general and administrative expenses in the accompanying
condensed consolidated statement of income for the three-month period
ended March 31, 2000.
At March 31, 2000, Century had a $5.0 million reserve for lease
consolidation obligations, and a $4.8 million reserve for severance
and benefits, designated to cover 191 employees.
8. DISCONTINUED OPERATIONS
In April 1999, Century adopted a formal plan to divest its risk-bearing
specialty insurance segment, which is no longer part of Century's
strategic long-term growth objectives. The risk-bearing specialty
insurance segment, which includes Century Surety Company, Evergreen
National Indemnity, and Continental Heritage Insurance Company, is
reported as a discontinued operation and its net assets and results of
operations are reported separately in the unaudited condensed
consolidated financial statements. Revenues from the discontinued
operations for the three-month period ended March 31, 2000 and 1999
were $11.3 million and $11.7 million, respectively. The Company has
signed a letter of intent and expects to complete the sale of the
specialty insurance segment prior to June 30, 2000, subject to
regulatory approval.
8
<PAGE> 9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
9. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," established
standards for reporting selected information about operating segments,
products and services, geographic areas and major customers.
Century's business units have been aggregated into four reportable
segments: business solutions; benefits and insurance; performance
consulting and technology solutions services. Segment information for
the three-month periods ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 2000
Business Benefits & Performance Technology Corporate Total
Solutions Insurance Consulting Solutions and Other
---------- ------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 108,010 $ 46,873 $ 5,224 $ 12,013 $ - $ 172,120
Operating Income 31,425 9,814 1,692 (229) - 42,702
Depreciation and amortization 1,685 596 38 119 8,326 10,764
Interest expense 66 68 8 (2) 2,555 2,695
Pre-tax income (loss) 27,674 8,120 1,646 (416) (15,398) 21,626
Income tax expense (benefit) $ 12,182 $ 3,199 $ 526 $ (297) $ (4,364) $ 11,246
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
Business Benefits & Performance Technology Corporate Total
Solutions Insurance Consulting Solutions and Other
---------- ------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 86,740 $ 36,365 $ 3,957 $ 11,310 $ - $ 138,372
Operating Income 25,400 5,689 1,570 1,083 - 33,742
Depreciation and amortization 1,175 661 25 84 2,438 4,383
Interest expense 113 158 - 86 940 1,297
Pre-tax income (loss) 27,112 6,728 1,545 913 (11,470) 24,828
Income tax expense (benefit) $ 10,049 $ 2,439 $ 520 $ 345 $ (3,717) $ 9,636
</TABLE>
10. SUBSEQUENT EVENTS
Divestitures
In December 1999, Century announced the divestiture of four smaller
non-core business units. During the three-month period ended March 31,
2000, Century sold three of these business units for an aggregate price
of $1.2 million, resulting in a loss of $0.6 million, which is included
in operating expenses in the accompanying condensed consolidated
statements of income. In addition, the assets of the remaining business
have been adjusted to net realizable value (based on estimated sales
proceeds), resulting in a loss of $0.4 million.
9
<PAGE> 10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Century Business Services, Inc. ("Century") is a diversified services company,
which acting through its subsidiaires provides professional outsourced business
services to small and medium-sized companies, as well as individuals, government
entities, and not-for-profit enterprises predominantly throughout the United
States. Century provides integrated services in the following areas: accounting,
advisory, tax, and valuation; litigation advisory services; benefits
administration and insurance; human resources and payroll; and information
technology.
RESULTS OF OPERATIONS
Revenues
Business service fees and commissions increased to $172.1 million for
the three-month period ended March 31, 2000, from $138.4 million for the
comparable period in 1999, an increase of $33.7 million, or 24.4%. The $33.7
million increase was primarily attributable to (i) Century's acquisitions
completed subsequent to the first quarter of 1999 that were accounted for under
the purchase method of accounting, and (ii) internal growth.
For the companies with a full period of operations for the three-month
period ended March 31, 2000 and 1999, Century achieved an internal growth rate
of 10.1%. Internal growth rate is based on the increase in revenues of companies
that have a full period of operations for the three-month period ended March 31,
2000, including companies that are accounted for as poolings-of-interests, as
compared to the comparable periods in 1999.
Expenses
Total expenses increased to $150.5 million for the three-month period
ended March 31 2000, from $113.5 million for the comparable period in 1999. As a
percentage of revenue, total expenses were 87.4% for the three-month period
ended March 31, 2000 compared to 82.1% for the three-month period ended March
31, 2000. Excluding the consolidation and integration credit (pre-tax) of $0.6
million, total expenses as a percentage of revenue were 87.8% for the
three-month period ended March 31, 2000, compared to 82.1% for the three-month
period ended March 31, 1999, and is primarily related to the change in the
goodwill amortization period from 40 years to 15 years adopted October 1, 1999,
and increased interest expense associated with Century's bank debt.
Operating expenses increased to $129.4 million for the three-month
period ended March 31, 2000, from $104.6 million for the comparable periods in
1999, primarily due to acquisitions completed subsequent to the first quarter of
1999 that were accounted for under the purchase method of accounting. As a
percentage of revenue, operating expenses for the three-month period ended March
31, 2000 were 75.2%, compared to 75.6% for the comparable period. The primary
components of operating expenses are personnel costs and occupancy expense.
Personnel costs increased as a percentage of revenue to 53.4% for the
three-month period ended March 31, 2000, from 50.8% in the comparable periods in
1999, due to purchase acquisitions, general increases for cost of living raises
and incentives, and higher health care costs due to unfavorable claims
experience. Excluding consolidation and integration expenses, operating expenses
as a percentage of revenue were 77.0% for the three-month period ended March 31,
2000, compared to 75.6% for the three-month period ended March 31, 1999.
Corporate general and administrative expenses increased to $8.5 million
for the three-month period ended March 31, 2000, from $3.1 million for the
comparable periods in 1999. Excluding consolidation and integration expenses
which consist primarily of costs related to severance payments and the new
shared services center, corporate general and administrative expenses increased
to $5.9 million for the three-month period ended March 31, 2000, from $3.1
million for the comparable periods in 1999. Such increase was attributable to
the expansion of the corporate function to accommodate Century's infrastructure
and corporate initiatives, health care costs due to unfavorable claims
experiences, and costs to implement and support the LINCS initiative and its
initial roll out January 1, 2000. Excluding consolidation and integration
expenses, corporate general and administrative expenses represented 3.5% of
total revenues for the three-month period ended March 31, 2000, up from 2.2% for
the comparable period in 1999, respectively.
For the three-month period ended March 31, 2000, there were no
merger-related expenses as the acquisition program was significantly slowed
down, as compared to merger-related expenses of $1.5 million for the comparable
period. Merger-related expenses are comprised primarily of professional fees
incurred in transactions
10
<PAGE> 11
accounted for as poolings-of-interests and the salaries of professional
employees dedicated to those merger activities.
Depreciation and amortization expenses increased to $10.8 million for
the three-month period ended March 31, 2000, from $4.4 million for the
comparable periods in 1999, an increase of $6.4 million, or 145.6%. The
increase is a result of the goodwill associated with acquisitions completed in
1999, as well as the change in the goodwill amortization period from 40 to 15
years beginning October 1, 1999. The change in goodwill amortization resulted in
of approximately $4.4 million in additional goodwill amortization expense in the
first quarter of 2000. The increase is also a result of increased depreciation
for the Oracle application placed into service on January 1, 2000, and the
overall increase in fixed asset costs. As a percentage of total revenues,
depreciation and amortization expense was 6.3% for the three-month period ended
March 31, 2000, compared to 3.2% for the comparable periods in 1999.
Century recorded income taxes from continuing operations of $11.2
million on a pro forma basis ($11.2 million actual) for the three-month period
ended March 31, 2000 compared to $10.0 million on a pro forma basis ($9.6
million actual) for the comparable periods in 1999. The effective tax rate
increased to 52.0% on a pro forma basis (52.0% actual) for the three-month
period ended March 31, 2000, from 40.3% on a pro forma basis (38.8% actual) for
the comparable periods in 1999. Income taxes are provided based on Century's
anticipated annual effective rate. The increase in the effective tax rate is
primarily attributable to the increased amortization expenses, the majority of
which is not deductible for tax purposes.
OTHER
Total assets increased to $799.8 million at March 31, 2000, from $787.3
million at December 31, 1999, primarily attributable to purchase acquisitions
completed during 1999. Total assets increased $12.5 million, primarily due to
increases in accounts receivable of $31.6 million, offset by decreases in
various other assets. Total liabilities increased approximately $7.5 million,
primarily due to the increase in bank debt of $14.5 million. Total stockholders'
equity increased $5.0 million due to net income for the first three months of
2000 of $9.3 million, offset by a decrease in additional paid-in-capital of $4.3
million. The decrease in paid-in-capital in the first quarter of 2000 is
primarily related to a change in the purchase price composition, (i.e., cash and
common stock) of an acquisition that was completed near the end of 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended March 31, 2000, cash and cash
equivalents decreased $8.6 million to $40.3 million, from $48.9 million at
December 31, 1999, as cash provided by financing activities of $1.5 million
exceeded cash used by continuing operating activities of $11.8 million and cash
used in investing activities of $12.3 million.
Cash used in investing activities consisted primarily of cash used in
business acquisitions and purchases of property and equipment. Significant
purchases of property and equipment in the first three months of 2000 are
primarily attributable to the purchase of software from Oracle and related
capital costs incurred to implement the enterprise-wide solution to integrate
back office operations.
During the three months ended March 31, 2000, cash provided by
financing activities consisted primarily of proceeds from the revolving credit
facility of $35.2 million, and the repayment of bank debt of $20.7 million. The
proceeds from these financing activities were used for general corporate
purposes and working capital requirements.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased to $34.4 million for the three-month period ended March 31, 2000, from
$29.6 million for the comparable period in 1999, an increase of $4.8 million, or
16.2%. Such increases are primarily attributable to Century's acquisitions
completed subsequent to the first quarter of 1999 that were accounted for under
the purchase method of accounting.
11
<PAGE> 12
FORWARD-LOOKING STATEMENTS
Statements included in the Form 10-Q, which are not historical in
nature, are forward-looking statements made under the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
are commonly identified by the use of such terms as "intends", "estimates",
"expects", "projects", "anticipates", "foreseeable future," "seeks", "believes",
and words and phrases of similar import. Such statements are subject to certain
risks, uncertainties or assumptions. Should one or more of these risks or
assumptions materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct. Factors that could cause actual
results to differ materially from the Century's expectations ("Cautionary
Statements") include: (i) Century's ability to acquire and finance additional
businesses; (ii) Century's ability to adequately manage growth; (iii) Century's
dependence on the current trend of outsourcing business services; (iv) Century's
dependence on the services of key employees; (v) Century's ability to realize
the full value of goodwill; (vi) the risk of professional errors and omissions;
(vii) the nature of the competitive and fragmented outsourcing industry; (viii)
market fluctuations in the values or returns on assets in Century's investment
portfolios; (ix) government regulations and interpretations are subject to
changes; (x) Century's principal shareholders have substantial control over its
operations; (xi) shares eligible for future sale could adversely affect the
price of Century's common stock; (xii) Century may not pay dividends; and
(xiii) Century's ability to manage risks associated with its discontinued
specialty insurance business, such as risk of inadequate insurance premiums,
underestimating reserves, and the risk that reinsurers may fail. All
forward-looking statements in this Form 10-Q are expressly qualified by the
Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
The Company's exposure to market risk, including interest rate risk, is
immaterial. If market interest rates were to increase or decrease immediately
and uniformly by 100 basis points from the levels at March 31, 2000, in each
case the impact on the Company's financial condition and results of operations
would be immaterial. The Company does not engage in trading market risk
sensitive instruments and does not purchase hedging instruments or "other than
trading" instruments that are likely to expose the Company to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk. The Company has not issued debt instruments, entered into forward or
futures contracts, purchased options or entered into swaps. The Company's
primary market risk exposure is that of interest rate risk. A change in the
Federal Funds Rate, or the Reference Rate set by the Bank of America (San
Francisco), would affect the rate at which the Company could borrow funds under
its Credit Facility.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Century is involved in certain legal proceedings as described in Part I,
"Item 3 - Legal Proceedings" in our Annual Report on Form 10-K for 1999. In
April 2000, the following class-action lawsuits were consolidated into a single
case in the United States District Court for the Northern District of Ohio:
Darby, et al. v. Century Business Services, Inc., et al.; and Marsh, et al. v.
Century Business Services, Inc., et al. In April 2000, the Albert, et al. v.
Century Business Services, Inc., et al. case was transferred to the United
States District Court for the Northern District of Ohio. Century expects that
the Albert class-action suit will be consolidated with the other aforementioned
lawsuits.
On February 28, 2000, Century filed a lawsuit against certain former owners of a
business acquired by it in the Circuit Court for St. Louis County, Missouri.
Century claims that the former owners made material misrepresentations regarding
their company to induce its purchase and breached certain contractual
obligations arising out of the acquisition. On March 31, 2000, the former owners
filed claims against Century alleging certain violations of federal and state
securities laws, negligent and intentional misrepresentations and breach of
contract. On May 10, 2000, the former owners also filed a parallel lawsuit
against Century in the United States District Court for the Northern District of
Ohio. Century intends to vigorously defend against the allegations set forth in
the complaint.
On March 1, 2000, Devon Capital Management, L.P. (Devon), filed suit against
Century in the United States District Court for the Northern District of Ohio.
The case involves claims against Century for breach of contract, fraudulent
inducement, indemnification and accounting. Century intends to vigorously defend
against the allegations set forth in the complaint. Moreover, Century has filed
counterclaims against Devon for fraud, breach of contract and declaratory
relief. The case is in the early stages and discovery has not yet commenced.
On May 5, 2000, certain former owners of a business acquired by Century filed
action against Century and one of its former officers, in the Court of Common
Pleas, Cuyahoga County, Ohio. The case involves claims for misrepresentation,
negligent misrepresentation, breach of contract, declaratory judgment and
recession. The case is in the early stages and discovery has not yet commenced.
Century intends to vigorously defend against the allegations set forth in the
complaint.
In addition to the above described items, Century is from time to time subject
to claims and suits arising in the ordinary course of business. Although the
ultimate disposition of such proceedings is not presently determinable,
management does not believe that the ultimate resolution of these matters will
have a material adverse effect on the financial condition, results of operations
or cash flows of Century.
ITEM 2. CHANGES IN SECURITIES
(c) Issuances of unregistered shares during the three months ended
March 31, 2000, were as follows:
All transactions listed below involve the issuance of shares of Common
Stock by Century in reliance upon Section 4(2) of the Securities Act of
1933, as amended.
On January 7, 2000, in connection with the acquisition of Andrew M.
Watkins, CPA, P.C., Century issued 39,474 shares of Common Stock and
cash in exchange for all the outstanding shares of Andrew M. Watkins,
CPA, P.C.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed during
the three months ended March 31, 2000:
(i) On January 31, 2000, Century issued a
press release to report lower-than-expected
fourth quarter 1999 earnings, that
it had terminated its
12
<PAGE> 13
engagement with Merrill Lynch to explore
strategic alternatives in order to focus on
integration and growth of is core business, and
that Fred M. Winkler, its President and Chief
Operating Officer and a Director, had resigned.
13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Business Services, Inc.
-------------------------------
(Registrant)
Date: May 15, 2000 By: /s/ Charles D. Hamm, Jr.
------------------- ------------------------
Charles D. Hamm, Jr.
Chief Financial Officer
14
<PAGE> 15
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number:
- ---------------
27.1 Financial Data Schedule (SEC only).............................. 16
99.2 Amendment to the Amended and Restated 1996 Employee
Stock Option Plan............................................... 17
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 56,175
<SECURITIES> 0
<RECEIVABLES> 236,842
<ALLOWANCES> 13,997
<INVENTORY> 0
<CURRENT-ASSETS> 339,578
<PP&E> 85,490
<DEPRECIATION> 24,571
<TOTAL-ASSETS> 799,828
<CURRENT-LIABILITIES> 93,491
<BONDS> 0
0
0
<COMMON> 933
<OTHER-SE> 517,172
<TOTAL-LIABILITY-AND-EQUITY> 799,828
<SALES> 0
<TOTAL-REVENUES> 172,120
<CGS> 0
<TOTAL-COSTS> 129,418
<OTHER-EXPENSES> 18,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,695
<INCOME-PRETAX> 21,626
<INCOME-TAX> 11,246
<INCOME-CONTINUING> 10,380
<DISCONTINUED> (1,083)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,297
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
<PAGE> 1
Exhibit 99.2
CENTURY BUSINESS SERVICES, INC.
SECRETARY'S CERTIFICATE
I, Barbara A. Rutigliano, hereby certify that I am the duly elected and
incumbent Corporate Secretary of Century Business Services, Inc., a Delaware
corporation (the "Company"), and that, as such, I am authorized to execute and
deliver this certificate on behalf of the Company, and do hereby certify as
follows:
The Board of Directors of Century Business Services, Inc. on February
29, 2000 duly adopted a certain resolution to further amend the Amended
and Restated 1996 Employee Stock Option Plan (the "Plan"), to add
3,000,000 options to the Plan and reserve 3,000,000 shares of stock for
issuance upon exercise of such options to bring the total number of
options available under the Plan to 10,000,000; and
Section 4. of the Plan, GRANTING OF OPTIONS, has therefore been amended
to read as follows:
"Options under which a total of not in excess of 10,000,000 shares of
the $.01 par value common stock of the Company ("Common Stock") may be
purchased from the Company, subject to adjustment as provided in
Section 10. In the event that an option expires or is terminated,
canceled or unexercised as to any shares, such released shares may
again be optioned (including a grant in substitution for a canceled
option). Shares subject to options may be made available from unissued
or reacquired shares of Common Stock. Nothing contained in the Plan or
in any option granted pursuant thereto shall confer upon any Optionee
any right to be continued in the employment of the Company or as a
director or consultant to the Company, or interfere in any way with
the right of the Company to terminate his employment or consulting
relationship at any time."
Such resolutions are in full force and effect and have not been
amended or modified as of the date hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Company's seal
this 11th day of May, 2000.
[SEAL]
CENTURY BUSINESS SERVICES, INC.
By: /s/ Barbara A. Rutigliano
----------------------------
Barbara A. Rutigliano
Corporate Secretary
