<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to
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Commission file number 0-25890
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CENTURY BUSINESS SERVICES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2769024
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
6480 Rockside Woods Boulevard South, Suite 330, Cleveland, Ohio 44131
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
--------------------------
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Former Name, Former Address and Former Fiscal Year, if Changed since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------ -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding at
Class of Common Stock October 31, 2000
--------------------- ----------------
Par value $.01 per share 95,479,629
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Exhibit Index is on page 16 of this report.
1
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Notes to the Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Item 3. Quantitative and Qualitative Information about Market Risk 14
PART II OTHER INFORMATION :
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
Exhibit Index 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(Unaudited) 1999
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 39,051 $ 48,906
Restricted cash 17,567 17,246
Receivables, net of allowance of
$14,549 and $13,272 205,541 188,359
Notes receivable - current 2,850 3,209
Income taxes recoverable 6,506 14,835
Deferred income taxes 7,212 9,912
Other current assets 11,966 13,001
Net assets of discontinued operations 28,000 36,813
--------- ---------
Total current assets 318,693 332,281
Goodwill, net of accumulated amortization of
$32,506 and $18,527 366,692 379,922
Fixed assets, net of accumulated depreciation and
amortization of $31,079 and $21,792 63,857 56,148
Notes receivable - non-current 5,946 4,856
Other assets 17,425 14,136
--------- ---------
TOTAL ASSETS $ 772,613 $ 787,343
========= =========
LIABILITIES
Accounts payable $ 41,237 $ 41,228
Notes payable and capitalized leases - current 5,242 6,534
Accrued expenses 38,573 50,833
--------- ---------
Total current liabilities 85,052 98,595
Bank debt 145,000 144,000
Notes payable and capitalized leases - long term 2,137 1,345
Deferred income taxes 11,085 11,968
Accrued expenses 16,238 18,303
--------- ---------
TOTAL LIABILITIES 259,512 274,211
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 936 933
Additional paid-in capital 439,339 443,052
Retained earnings 75,207 74,170
Unearned ESOP (1,795) (1,795)
Treasury stock (754) (754)
Accumulated other comprehensive income (loss) 168 (2,474)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 513,101 513,132
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 772,613 $ 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 OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 139,434 138,119 $ 459,818 408,743
Expenses:
Operating 120,166 106,414 375,331 312,460
Corporate general and administrative 4,512 3,101 18,099 8,841
Merger-related - 2,595 - 5,280
Depreciation and amortization 11,201 4,857 32,431 13,487
Interest expense 3,102 1,691 9,294 4,460
Other income, net (666) (1,281) (2,795) (3,989)
--------- --------- --------- ---------
Total expenses 138,315 117,377 432,360 340,539
Income from continuing operations before
income tax expense 1,119 20,742 27,458 68,204
Income tax expense 2,538 7,661 17,024 25,460
--------- --------- --------- ---------
Net income (loss) from continuing operations (1,419) 13,081 10,434 42,744
Income (loss) from operations of discontinued business,
net of tax 546 (1,417) (1,214) (548)
Gain (loss) on disposal of discontinued business, net of tax 238 - (8,183) -
--------- --------- --------- ---------
Net income (loss) $ (635) $ 11,664 $ 1,037 $ 42,196
========= ========= ========= =========
Earnings (loss) per share:
Basic:
Continuing operations $ (0.02) $ 0.15 $ 0.11 $ 0.51
Discontinued operations 0.01 (0.02) (0.10) (0.01)
--------- --------- --------- ---------
Net income $ (0.01) $ 0.13 $ 0.01 $ 0.50
========= ========= ========= =========
Diluted:
Continuing operations $ (0.02) $ 0.14 $ 0.11 $ 0.47
Discontinued operations 0.01 (0.02) (0.10) (0.01)
--------- --------- --------- ---------
Net income (loss) $ (0.01) $ 0.12 $ 0.01 $ 0.46
========= ========= ========= =========
Pro forma income data (from continuing operations):
Net income as reported $ (1,419) $ 13,081 $ 10,434 $ 42,744
Pro forma adjustment to provision for income taxes - 389 - 1,762
--------- --------- --------- ---------
Pro forma net income (loss) $ (1,419) $ 12,692 $ 10,434 $ 40,982
========= ========= ========= =========
Pro forma earnings per share:
Basic $ (0.02) $ 0.15 $ 0.11 $ 0.48
========= ========= ========= =========
Diluted $ (0.02) $ 0.14 $ 0.11 $ 0.45
========= ========= ========= =========
Basic weighted average shares outstanding 93,645 87,014 93,615 84,557
========= ========= ========= =========
Diluted weighted average shares outstanding 94,345 94,011 94,577 91,249
========= ========= ========= =========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES $ 18,425 $ (4,047)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (additions to) notes receivable (731) 926
Business acquisitions, net of cash acquired (5,090) (31,009)
Purchases of property and equipment (18,317) (27,614)
Proceeds from dispositions of property and equipment 711 337
--------- ---------
Net cash used in investing activities (23,427) (57,360)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 87,500 197,000
Payment of bank debt (86,500) (126,000)
Proceeds from notes payable 3,349 12,933
Payment of notes payable and capitalized leases (9,326) (53,169)
Proceeds from stock issuances, net 17 24,572
Proceeds from exercise of stock options and warrants, net 107 9,479
Pre-merger equity transactions - (2,363)
--------- ---------
Net cash provided by (used in) financing activities (4,853) 62,452
--------- ---------
Net increase (decrease) in cash and cash equivalents (9,855) 1,045
Cash and cash equivalents at beginning of period 48,906 43,593
--------- ---------
Cash and cash equivalents at end of period $ 39,051 $ 44,638
========= =========
</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 September 30, 2000 and December
31, 1999, and the results of their operations for the three and
nine-month periods ended September 30, 2000 and 1999, and cash flows
for the nine-month periods ended September 30, 2000 and 1999. The
results of operations for such interim periods are not necessarily
indicative of the results for the full year. The accompanying unaudited
condensed consolidated interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and with instructions to Form 10-Q, and accordingly
do not include all disclosures required by generally accepted
accounting principles. The 1999 condensed consolidated balance sheet
was derived from Century's audited consolidated balance sheet included
in the Company's annual report on Form 10-K for the year ended December
31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates. Certain reclassifications have been made to the 1999
financial statements to conform to the 2000 presentation.
Operating revenues are seasonal in nature with peak revenues occurring
in the months of January through April. Thus, the three-month results
are not indicative of results to be expected for the year.
2. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents consist of funds held on deposit and
short-term highly liquid investments with a maturity of three months or
less at the date of purchase. At various times during the year, Century
had deposits with financial institutions in excess of the $100,000
federally insured limit.
Restricted cash represents funds on deposit from clients for which the
Company is administering and settling claims. A related liability for
these funds is recorded in accrued expenses in the balance sheet.
3. CONTINGENCIES
Century is involved in litigation, arising in the normal course of
business. While it cannot be predicted with certainty, management
believes that the outcome of such litigation will not have a material
adverse effect on Century's financial condition, results of operations
or cash flows. See "Part II - Other Information, Item 1. Legal
Proceedings" for additional information.
4. COMPREHENSIVE INCOME
Items considered other comprehensive income are the adjustments made
for unrealized holding gains and losses on available-for-sale
securities (primarily held by the discontinued operations) and foreign
currency translation adjustments. Comprehensive income (loss) for the
three months ended September 30, 2000 and 1999, was ($0.6 million) and
$11.3 million, respectively. Comprehensive income for the nine months
ended September 30, 2000 and 1999, was $3.7 million and $40.2 million,
respectively.
6
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
5. EARNINGS PER SHARE
For the periods presented, Century presents both basic and diluted
earnings per share. The following data shows the amounts (in thousands)
used in computing earnings per share and the effect on the weighted
average number of dilutive potential common shares. Included in
potential dilutive common shares are contingent shares, which represent
shares issued and placed in escrow that will not be released until
certain performance goals have been met or exceeded.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Denominator
Basic
Weighted average common
shares 93,645 87,014 93,615 84,557
------ ------ ------ ------
Diluted
Warrants - 6,359 - 6,164
Options 43 397 305 287
Contingent shares 657 241 657 241
------ ------ ------ ------
Total 94,345 94,011 94,577 91,249
====== ====== ====== ======
</TABLE>
6. CONSOLIDATION AND INTEGRATION CHARGES
Consolidation and integration reserve balances as of December 31, 1999,
activity during the nine-month period ended September 30, 2000, and the
remaining reserve balances as of September 30, 2000, were as follows
(in thousands):
<TABLE>
<CAPTION>
Lease Consolidation Severance &
(1) Benefits (2)
------- -------
<S> <C> <C>
Reserve balance at December 31, 1999 $ 9,400 4,150
Amounts adjusted (5,901) (2,445)
Amounts charged to income 7 3,579
Amounts utilized (56) (2,733)
------- -------
Reserve balance at September 30, 2000 $ 3,450 2,551
======= =======
</TABLE>
(1) Amounts designated as "adjusted" and "charged to income"
are included in operating expense in the accompanying
condensed consolidated statement of operations for the
nine-month period ended September 30, 2000.
(2) Amounts designated as "adjusted" of ($2.4 million) are
included in corporate general and administrative expense in
the accompanying condensed consolidated statement of
operations for the nine-month period ended September 30, 2000.
Included in the $3.6 million designated as "amounts charged
to income" are $3.0 million and $0.6 million, which are
reported in corporate general and administrative expense and
operating expense, respectively, in the accompanying condensed
consolidated statement of operations for the same period.
During the fourth quarter of fiscal 1999, Century's Board of Directors
approved a plan to consolidate several operations in multi-office
markets and integrate certain back-office functions into a
shared-services center. The plan included the consolidation of at least
60 office locations, the elimination of more than 200 positions
(including Corporate), and the divestiture of four small, non-core
businesses. Pursuant to the plan, Century recorded a consolidation and
integration pre-tax charge of $27.4 million, which included $4.8
million for severance and $9.4 million for obligations under various
noncancellable leases that were committed to prior to plan approval,
for which no economic benefit to Century would be subsequently
realized.
7
<PAGE> 8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued)
6. CONSOLIDATION AND INTEGRATION CHARGES (continued)
As a result of executive management changes (including the replacement
of Century's President and Chief Operating Officer) and certain
strategic changes in the first quarter of fiscal 2000, Century
revisited the extent of its planned integration and consolidation
initiatives and extended the timing of certain office consolidations
beyond one year. Century's Board of Directors approved the revision to
the plan on March 31, 2000. Accordingly, Century reduced approximately
$4.4 million of accruals originally provided for in the plan related to
the aforementioned noncancellable lease obligations.
During the third quarter of 2000, Century reduced the lease accrual by
$1.5 million for the planned consolidation in the Philadelphia market
place that has been postponed. The consolidation of offices in Atlanta,
Dallas, and Orlando were completed during the third quarter, with the
remaining planned consolidations in progress. Severance amounts of $1.1
million were reversed during the third quarter, representing several
business managers originally accrued for in the plan, which were either
not terminated or did not receive a severance package. At the same
time, the Company incurred $1.1 million of expense for several
employees that were not accrued for under the original plan.
For the three-months ended September 30, 2000, Century recorded on a
pre-tax basis net severance expense of $0.1 million, net credits of
$1.5 million related to lease expense, and $0.1 million for other
consolidation related charges. For the nine-months ended September 30,
2000, Century recorded on a pre-tax basis net severance expense of $1.7
million, net credits of $5.7 million related to lease expense, $1.5
million for other consolidation related charges, and $1.0 million
related to the write-down on the divestiture of four non-core
businesses.
At September 30, 2000, Century had a $3.5 million reserve for lease
consolidation obligations, and a $2.6 million reserve for severance and
benefits, designated to cover 112 employees.
7. DISCONTINUED OPERATIONS
In April 1999, Century adopted a formal plan to divest its risk-bearing
specialty insurance segment, which is no longer part of Century's
strategic long-term growth objectives. The risk-bearing specialty
insurance segment, which includes Century Surety Company, Evergreen
National Indemnity Company, and Continental Heritage Insurance Company,
is reported as a discontinued operation and its net assets and results
of operations are reported separately in the unaudited condensed
consolidated financial statements.
On June 26, 2000, Century entered into a binding agreement for the
sale of its risk-bearing specialty insurance segment, as well as
American Inspection and Audit Services, Inc. and CSC Insurance Agency,
Inc. (collectively, the Divested Entities) with Avalon National
Corporation (ANC), subject to regulatory approval. ANC assigned its
rights under the purchase agreement to ProFinance Holdings
Corporation (which is a consortium of financial entities) and certain
members of the risk-bearing division's management. On October 5, 2000,
Century completed the sale of the Divested Entities for $28.0 million.
Revenues from the discontinued operations for the three-month periods
ended September 30, 2000 and 1999 were $12.0 million and $12.4 million,
respectively, and $34.0 million and $37.1 million for the nine-month
periods ended September 30, 2000 and 1999, respectively.
8
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
8. SEGMENT REPORTING
On July 3, 2000, Century approved a plan to operate under a regional
structure rather than by service line. Regional Directors were
appointed to the following regions: Northeast, Great Lakes, Southeast,
Midwest, Rocky Mountain, and Western. In addition to the six regions,
certain business units will report under the National Practices group,
as these units have a national platform to provide services to
customers. Century has decided to manage the business by region
effective July 3, 2000, although that the financial reports will not be
fully functional to report by location until January 1, 2001.
Therefore, the segment disclosures below depict the business by service
lines, as previously reported.
Century's business units have been aggregated into four reportable
segments: business solutions; benefits and insurance; performance
consulting and technology solutions services. Segment information for
the three and nine-month periods ended September 30, 2000 and 1999 is
as follows:
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 2000
----------------------------------------------------------------------------------------------
Business Benefits & Perform. Technology Corporate
Solutions Insurance Consult. Solutions and Other Total
---------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 79,991 44,930 4,013 10,500 - 139,434
Operating income (1) 7,080 10,531 697 720 240 19,268
Corporate gen. and admin. (1) - - - - 4,512 4,512
Depreciation and amortization 1,679 960 45 138 8,379 11,201
Interest expense 47 48 - 6 3,001 3,102
Other expense (income), net (263) (1,249) (7) 254 599 (666)
Pre-tax income (loss) 5,617 10,772 659 322 (16,251) 1,119
<CAPTION>
For the Three Months Ended September 30, 1999
----------------------------------------------------------------------------------------------
Business Benefits & Perform. Technology Corporate
Solutions Insurance Consult. Solutions and Other Total
---------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 78,591 42,120 5,863 11,545 - 138,119
Operating income 16,224 11,245 2,551 1,559 126 31,705
Corporate gen. and admin. - - - - 3,101 3,101
Merger-related - - - - 2,595 2,595
Depreciation and amortization 1,443 813 31 101 2,469 4,857
Interest expense 75 103 - 37 1,476 1,691
Other expense (income), net (1,058) 212 (20) (57) (358) (1,281)
Pre-tax income (loss) 15,764 10,117 2,540 1,478 (9,157) 20,742
<CAPTION>
For the Nine Months Ended September 30, 2000
----------------------------------------------------------------------------------------------
Business Benefits & Perform. Technology Corporate
Solutions Insurance Consult. Solutions and Other Total
---------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 274,837 139,041 13,750 32,190 - 459,818
Operating income (1) 52,833 29,087 3,226 202 (861) 84,487
Corporate gen. and admin. (1) - - - - 18,099 18,099
Depreciation and amortization 4,984 2,302 122 382 24,641 32,431
Interest expense 374 178 8 8 8,726 9,294
Other income, net (780) (2,232) (21) (271) 509 (2,795)
Pre-tax income (loss) 48,255 28,839 3,117 83 (52,836) 27,458
<CAPTION>
For the Nine Months Ended September 30, 1999
----------------------------------------------------------------------------------------------
Business Benefits & Perform. Technology Corporate
Solutions Insurance Consult. Solutions and Other Total
---------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 240,920 121,462 14,708 31,653 - 408,743
Operating income 61,197 29,887 6,193 1,997 (2,991) 96,283
Corporate gen. and admin. - - - - 8,841 8,841
Merger-related - - - - 5,280 5,280
Depreciation and amortization 3,860 2,245 85 270 7,027 13,487
Interest expense 208 481 - 184 3,587 4,460
Other income, net (1,750) (901) (23) (213) (1,102) (3,989)
Pre-tax income (loss) 58,879 28,062 6,131 1,756 (26,624) 68,204
</TABLE>
(1) Includes consolidation and integration charges (credits) as discussed in
Footnote 6 to the condensed consolidated financial statements.
9
<PAGE> 10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (continued)
9. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes certain of the SEC's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. In March 2000, the SEC issued SAB
No. 101A that delayed the implementation date of SAB 101. In June 2000,
the SEC issued SAB 101B that further delayed the implementation date of
SAB No. 101. Century must adopt SAB 101 no later than the fourth
quarter of 2000. Century is currently evaluating the impact of adopting
these statements on its financial position and operating results. The
effect of the change, if any, would be recognized as a cumulative
effect of a change in accounting principle as of January 1, 2000. Prior
year financial statements will not be restated.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including some derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. The Company will adopt SFAS 133 in 2001, in accordance with
SFAS 137, which deferred the effective date of SFAS 133. The adoption
of this standard in 2001 is not expected to have a material impact on
Century's consolidated financial statements.
10. SUBSEQUENT EVENTS
On October 5, 2000, Century completed the sale of its risk-bearing
insurance segment. See Footnote 7, "Discontinued Operations", for
additional information.
On November 1, 2000, the Company completed the asset sale of its
franchise operation of Century Small Business Solutions, Inc, to
Fiducial Triple Check Inc., for approximately $5.4 million in cash,
resulting in an estimated pretax loss of approximately $3.4 million.
The sale transaction does not include the eight CBIZ-owned franchisee
offices. Net proceeds from the sale will be used for debt reduction.
10
<PAGE> 11
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
and tax; employee benefits; wealth management; property and casualty insurance;
payroll; information systems consulting and human resource consulting. Century
also provides valuation; litigation advisory; performance consulting; government
relations; commercial real estate; wholesale insurance; healthcare consulting;
medical practice management; worksite marketing; and capital advisory services.
RESULTS OF OPERATIONS
---------------------
Revenue
Revenue increased to $139.4 million for the three-month period ended September
30, 2000, from $138.1 million for the comparable period in 1999, an increase of
$1.3 million, or 1.0%. Such increase was primarily attributable to Century's
acquisitions completed subsequent to the second quarter of 1999 that were
accounted for under the purchase method of accounting, offset by a decline in
revenue on a same-store sales basis. Revenue increased to $459.8 million for the
nine-month period ended September 30, 2000, from $408.7 million for the
comparable period in 1999, an increase of $51.1 million, or 12.5%. Such increase
was primarily attributable to Century's acquisitions completed subsequent to
1999 that were accounted for under the purchase method of accounting, which
accounted for $33.3 million of such increase, and internal growth.
For the companies with a full period of operations for the three-month period
ended September 30, 2000 and 1999, revenue declined 1.5%, primarily due to
revenue shortfalls in certain business units, including the performance
consulting, valuation, and capital management business lines. For the companies
with a full period of operations for the nine-month period ended September 30,
2000 and 1999, Century achieved an internal growth rate of 4.7%. The internal
growth rate calculation includes all acquisitions accounted for as
pooling-of-interests.
Expenses
Total expenses increased to $138.3 million for the three-month period ended
September 30 2000, from $117.4 million for the comparable period in 1999, an
increase of $20.9 million, or 17.8%. As a percentage of revenue, total expenses
were 99.2% for the three-month period ended September 30, 2000 compared to 85.0%
for the comparable period in 1999. Total expenses increased to $432.4 million
for the nine-month period ended September 30 2000, from $340.5 million for the
comparable period in 1999, an increase of $91.8 million, or 27.0%. As a
percentage of revenue, total expenses were 94.0% for the nine-month period ended
September 30, 2000 compared to 83.3% for the comparable period in 1999. The
increase in total expense is related to the increase in operating expense, 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 expense increased to $120.2 million for the three-month period
September 30, 2000, from $106.4 million for the comparable period in 1999, an
increase of $13.8 million, or 12.9%. Operating expense increased to $375.3
million for the nine-month period ended September 30, 2000, from $312.5 million
for the comparable period in 1999, an increase of $62.8 million, or 20.1%. As a
percentage of revenue, operating expense for the three and nine-month periods
ended September 30, 2000 was 86.2% and 81.6%, respectively, compared to 77.0%
and 76.0% for the comparable periods. The increase in operating expense during
2000 was primarily due to acquisitions completed in 1999 and 2000 that were
accounted for under the purchase method of accounting, increased compensation
costs as a percentage of revenue, increased bad debt expense, and higher health
care costs due to unfavorable claims experience, offset by consolidation and
integration credits of $1.5 million related to the reversal of the lease accrual
for the consolidation of the Philadelphia market that has been postponed.
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Corporate general and administrative expense increased to $4.5 million for the
three-month period ended September 30, 2000, from $3.1 million for the
comparable period in 1999, an increase of $1.4 million. Corporate general and
administrative expense increased to $18.1 million for the nine-month period
ended September 30, 2000, from $8.8 million for the comparable period in 1999,
an increase of $9.3 million. Such changes over the three and nine-month periods
ended September 30, 2000, were primarily due to a) costs incurred in connection
with the start-up of the shared services center, support of the Oracle
application and other LINCS initiatives, b) legal fees associated with ongoing
litigation, and c) severance expense (credits) related to Century's
consolidation and integration initiatives.
Century incurred merger-related expenses of $2.6 million and $5.3 million for
the three and nine-month periods ended September 30, 1999. Merger-related
expenses are comprised primarily of professional fees incurred in transactions
accounted for as poolings-of-interests and the salaries of internal employees
dedicated to merger and acquisition activities. There were no merger-related
expenses in 2000 as a result of the significant reduction in Century's
acquisition program, and there were no transactions recorded as
poolings-of-interests in such period.
Depreciation and amortization expense increased to $11.2 million for the
three-month period ended September 30, 2000, from $4.9 million for the
comparable period in 1999, an increase of $6.3 million, or 130.6%. Depreciation
and amortization expense increased to $32.4 million for the nine-month period
ended September 30, 2000, from $13.5 million for the comparable period in 1999,
an increase of $18.9 million, or 140.5%. The increase in depreciation and
amortization expense in 2000 is a result of a) goodwill associated with
acquisitions completed in 1999 and 2000, b) the change in the goodwill
amortization period from 40 years to 15 years beginning October 1, 1999, and c)
increased depreciation expense related to the Oracle application placed into
service on January 1, 2000, and other capital expenditures. The change in the
goodwill amortization period resulted in an additional $3.6 million and $10.5
million of goodwill amortization expense for the three and nine-month periods
ended September 30, 2000, respectively.
Interest expense increased to $3.1 million for the three-month period ended
September 30, 2000, from $1.7 million for the comparable periods in 1999, an
increase of $1.4 million, or 82.4%. Interest expense increased to $9.3 million
for the nine-month period ended September 30, 2000, from $4.5 million for the
comparable periods in 1999, an increase of $4.8 million, or 106.7%. The increase
in interest expense is attributable to both the increase in the average bank
debt outstanding for the period, as well as an increase in the interest rate
from the prior year. The average bank debt balance and weighted-average interest
rate for the three-month period ended September 30, 2000, was $147.1 million and
8.7%, respectively, compared to $93.8 million and 6.3% for the corresponding
period in 1999.
Century recorded income taxes from continuing operations of $2.5 million and
$17.0 million for the three and nine-month periods ended September 30, 2000, and
$8.1 million and $27.2 million (including pro forma adjustments) for the three
and nine-month periods ended September 30, 1999. Including pro forma
adjustments, the effective tax rate increased to 226.8% from 38.8% for the
three-month period ended September 30, 2000 and 1999, respectively, and to 62.0%
from 39.9% (including pro forma adjustments) for the nine-month period ended
September 30, 2000 and 1999, respectively. The increase in the effective tax
rate is primarily attributable to increased goodwill amortization, as a result
of the change in our goodwill amortization period from 40 years to 15 years
effective October 1, 1999, the majority of which is not deductible for tax
purposes. Income taxes are provided based on Century's anticipated annual
effective rate.
The discontinued operation generated net operating income of $0.5 million
compared to a net operating loss of $1.4 million for the three-month period
ended September 30, 2000 and 1999, respectively, and a net operating loss of
$1.2 million compared to a net operating loss of $0.5 million for the nine-month
period ended September 30, 2000 and 1999, respectively. The $0.5 million net
income from operations of the discontinued operations represents the recovery of
the business, after incurring general operating losses and a write-off of
deferred acquisition costs related to its the exit of the transportation line of
business during the second quarter of 2000.
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OTHER
-----
Total assets decreased to $772.6 million at September 30, 2000, from $787.3
million at December 31, 1999, which is primarily attributable to the write-down
of the net assets of the discontinued operation from $36.8 at December 31, 1999,
to $28.0 million at September 30, 2000. See Note 7, "Discontinued Operations",
to the Condensed Consolidated Financial Statements. Total liabilities decreased
to $259.5 million at September 30, 2000, from $274.2 million at December 31,
1999, which is primarily attributable to a decrease in accrued expenses of $14.3
million. Total stockholders' equity remained at $513.1 at September 30, 2000,
and is attributable to net income for the first nine months of 2000 of $1.0
million, the adjustment of $2.5 million for unrealized losses on
available-for-sale securities that were realized as the loss on sale of the
discontinued operation, and a decrease in additional paid-in-capital of $3.7
million. The decrease in paid-in-capital is comprised of an increases of
approximately $1.4 million related to stock released for additional purchase
price, offset by a decrease of $5.1 million in the first quarter of 2000 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
-------------------------------
Century has two primary sources of liquidity: cash provided by operations and
funds available from the bank credit facility. We may also generate liquidity
from the sale of assets. During the quarter ended September 30, 2000, cash
provided by operations was sufficient to fund our working capital requirements.
As a result, we paid down borrowings under our credit agreement. Our principal
uses of cash are to provide working capital for operations, service our
obligations to pay interest and principal on our debt, and to provide funds for
capital expenditures.
During the nine-month period ended September 30, 2000, cash and cash equivalents
decreased $9.9 million to $39.1 million, from $48.9 million at December 31,
1999, as cash used in investing activities of $23.4 million and cash used in
financing activities of $4.9 million exceeded cash provided by operating
activities of $18.4 million.
Cash used in investing activities during the nine-month period ended September
30, 2000 were $23.4 million and consisted primarily of cash used in business
acquisitions (related to the release of contingent purchase price for previously
acquired businesses) and purchases of property and equipment. Significant
purchases of property and equipment in the first nine months of 2000 are
primarily attributable to the purchase of software from Oracle and related
capital costs incurred to implement the enterprise-wide solution to integrate
back office operations.
Cash used in financing activities during the nine-month period ended September
30, 2000 was $4.9 million and consisted primarily of proceeds of $90.8 million
from the revolving credit facility and notes payable, less repayments of bank
debt, notes payable and capitalized leases of $95.8 million. As acquisition
activity has slowed, Century is currently focusing on growing the core business,
controlling costs, and paying down the bank debt with excess cash from
operations, as well as cash received from divestitures.
During the third quarter of 2000, Century completed an amendment to its existing
credit facility with the banking group. Century is now in compliance with all
debt covenants under the amended credit facility. A copy of the amendment is
filed as an exhibit to this report. In the amendment Century agreed to use 75%
of the net proceeds received from the disposition of the risk-bearing insurance
company to pay down debt and permanently reduce the facility commitment amount.
Covenants relating to the leverage ratio for permitted acquisitions, specified
dispositions and permitted investment were changed, and a new covenant ties the
level of borrowings to the level of accounts receivable. Interest rates were
increased by 37.5 basis points.
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FORWARD-LOOKING STATEMENTS
--------------------------
Statements included in the Form 10-Q, which are not historical in nature, are
forward-looking statements made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are
commonly identified by the use of such terms as "intends", "estimates",
"expects", "projects", "anticipates", "foreseeable future," "seeks", "believes",
and words and phrases of similar import. Such statements are subject to certain
risks, uncertainties or assumptions. Should one or more of these risks or
assumptions materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct. Factors that could cause actual
results to differ materially from the Century's expectations ("Cautionary
Statements") include: (i) Century's ability to acquire and finance additional
businesses; (ii) Century's ability to adequately manage growth; (iii) Century's
dependence on the current trend of outsourcing business services; (iv) Century's
dependence on the services of key employees; (v) Century's ability to realize
the full value of goodwill; (vi) the risk of professional errors and omissions;
(vii) the nature of the competitive and fragmented outsourcing industry; (viii)
market fluctuations in the values or returns on assets in Century's investment
portfolios; (ix) government regulations and interpretations are subject to
changes; (x) Century's principal shareholders have substantial control over its
operations; (xi) shares eligible for future sale could adversely affect the
price of Century's common stock; (xii) Century may not pay dividends; and (xiii)
Century's ability to manage risks associated with its discontinued specialty
insurance business, such as risk of inadequate insurance premiums,
underestimating reserves, and the risk that reinsurers may fail. All
forward-looking statements in this Form 10-Q are expressly qualified by the
Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
The Company's exposure to market risk, including interest rate risk, is
immaterial. If market interest rates were to increase or decrease immediately
and uniformly by 100 basis points from the levels at June 30, 2000, in each case
the impact on the Company's financial condition and results of operations would
be immaterial. The Company does not engage in trading market risk sensitive
instruments and does not purchase hedging instruments or "other than trading"
instruments that are likely to expose the Company to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
The Company has not issued debt instruments, entered into forward or futures
contracts, purchased options or entered into swaps. The Company's primary market
risk exposure is that of interest rate risk. A change in the Federal Funds Rate,
or the Reference Rate set by the Bank of America (San Francisco), would affect
the rate at which the Company could borrow funds under its Credit Facility.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
During the third quarter ended September 30, 2000, there were no material
developments in previously reported legal proceedings other than as follows:
On July 31, 2000, Century moved to dismiss the action pending against it in the
United States District Court for the Northern District of Ohio, which was filed
by certain former owners of a business Century acquired in 1999. The court's
ruling on Century's motion to dismiss is pending. During the pendency of this
motion, discovery has been stayed. Discovery is also currently stayed in the
parallel state court action pending in the Circuit Court for St. Louis County,
Missouri. Century intends to continue vigorously defending against the
allegations against it.
On October 10, 2000, the Court of Common Pleas, Cuyahoga County, Ohio denied
Century's motion to dismiss the complaint filed against it by certain former
owners of a business acquired by Century. On October 24, 2000, Century sought
reconsideration of this order, which is pending. Discovery in this action has
commenced, and Century intends to continue vigorously defending against the
allegations against it.
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On April 11, 2000, Century and a wholly-owned subsidiary initiated a lawsuit in
Toronto, Canada against former owners of a business acquired by Century,
claiming (1) that the former shareholders breached representations and
warranties in the purchase agreement and (2) that a company owned by one of the
shareholders owed Century payment for services rendered. In addition, Century
asked the Ontario Court to declare that Century justifiably terminated the
employment contract of one of the former shareholders. On August 1, 2000 the
former shareholders and the company owned by a former shareholder filed
counterclaims against Century in the Ontario action, seeking damages from
Century for breach of contract, wrongful termination of employment, and
defamation. The case is in its early stages and discovery has just commenced.
Century intends to vigorously pursue its complaint and defend the counterclaims.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.6 The Third Amendment to Amended and Restated Credit
Agreement, dated as of September 22, 2000, by and among
Century Business Services, Inc., the Lenders party to
the Credit agreement, Bank of America, N.A. as Agent,
and Fleet National Bank, Bank One, Michigan, Lasalle
Bank National Association and PNC Bank, National
Association, each as Co-Agent.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K filed during the
three months ended September 30, 2000:
(i) On July 11, 2000, the Company filed a Current Report on
Form 8-K, announcing that on June 26, 2000, Avalon
National Corporation and a consortium of financial
entities entered into an agreement to purchase the
risk-bearing insurance operations for $31 million in
cash, contingent upon regulatory approval.
(ii) On July 12, 2000, the Company filed a Current Report on
Form 8-K/A, to amend the Form 8-K filed on July 11,
2000, to include the text of the Exhibit, Stock Purchase
Agreement by and among Century Business Services, Inc.,
CBSI Management Co. and Avalon National Corporation
dated June 26, 2000.
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: November 14, 2000 By: /s/ Chris Spurio
------------------- ----------------
Chris Spurio
Vice President, Acting Chief
Financial Officer
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number:
---------------
27.1 Financial Data Schedule (SEC only)............................. 17
99.6 Third Amendment to the Amended and Restated Credit Agreement... 18
16
