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, 1999
-------------------------------------------------
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 Incorporation (I.R.S. Employer
or Organization) Identification No.)
6480 Rockside Woods Boulevard South, Suite 330, Cleveland, Ohio 44131
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
---------------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- ------
Indicate 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 April 30, 1999
--------------------- --------------
Par value $.01 per share 76,885,898
----------
Exhibit Index is on page 14 of this report.
1
2
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 5
Notes to the Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-11
Item 3. Quantitative and Qualitative Information about Market Risk 12
PART II. OTHER INFORMATION :
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Exhibit Index 14
2
3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
ASSETS
Cash and cash equivalents $ 73,710 $ 42,883
Accounts receivable, less allowance for doubtful
accounts of $8,397 and $5,258 139,671 102,681
Investments available for sale, at fair value 324 328
Notes receivable - current 14,527 14,930
Other current assets 7,133 7,202
Net assets of discontinued operations 45,926 45,883
--------- ---------
Total current assets 281,291 213,907
Goodwill, net of amortization of $7,757 and $5,838 310,474 293,374
Fixed assets, net of accumulated depreciation of
$13,436 and $11,282 34,264 27,249
Notes receivable - non-current 3,124 3,116
Other assets 6,798 5,534
--------- ---------
Total non-current assets 354,660 329,273
--------- ---------
TOTAL CURRENT AND NON-CURRENT ASSETS $ 635,951 $ 543,180
========= =========
LIABILITIES
Accounts payable $ 35,414 $ 32,423
Income taxes - current 6,872 3,345
Notes payable and capitalized leases - current 5,787 27,765
Accrued expenses and other liabilities 33,411 32,406
--------- ---------
Total current liabilities 81,484 95,939
Bank debt 69,000 44,000
Notes payable and capitalized leases-long term 2,566 3,246
Income taxes - deferred 6,763 3,593
Accrued expenses and other liabilities 30,073 239
--------- ---------
Total non-current liabilities 108,402 51,078
--------- ---------
TOTAL CURRENT AND NON-CURRENT LIABILITIES 189,886 147,017
--------- ---------
SHAREHOLDERS' EQUITY
Common stock 765 734
Additional paid-in capital 365,454 330,363
Retained earnings 80,886 65,692
Unearned ESOP -- (755)
Treasury stock (755) --
Accumulated other comprehensive income (285) 129
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 446,065 396,163
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 635,951 $ 543,180
========= =========
See the accompanying notes to the condensed consolidated financial statements.
3
4
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
--------- ---------
Business service fee and commission revenues $ 124,978 $ 66,640
Expenses:
Operating expenses 92,325 51,862
Corporate general and administrative expenses 3,442 1,536
Merger and acquisition costs 1,176 3
Depreciation and amortization expenses 4,187 2,132
Interest income, net (209) (228)
--------- ---------
Total expenses 100,921 55,305
Income from continuing operations before
income tax expense 24,057 11,335
Income tax expense 9,490 3,853
--------- ---------
Income from continuing operations 14,567 7,482
Income from discontinued operations, net of income taxes 706 1,594
--------- ---------
Net income $ 15,273 $ 9,076
========= =========
Basic earnings per share:
Continuing operations $ 0.20 $ 0.14
Discontinued operations 0.01 0.03
--------- ---------
Net income $ 0.21 $ 0.17
========= =========
Diluted earnings per share:
Continuing operations $ 0.18 $ 0.12
Discontinued operations 0.01 0.02
--------- ---------
Net income $ 0.19 $ 0.14
========= =========
Pro forma income data from continuing operations :
Net income as reported $ 14,567 $ 7,482
Pro forma adjustment to provision for income taxes 133 336
--------- ---------
Pro forma net income $ 14,434 $ 7,146
========= =========
Pro forma earnings per share:
Basic $ 0.19 $ 0.14
========= =========
Diluted $ 0.18 $ 0.11
========= =========
Weighted average common shares 74,625 52,009
========= =========
Weighted average common shares and dilutive
potential common shares 82,092 66,357
========= =========
See the accompanying notes to the condensed consolidated financial statements.
4
5
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
-------- --------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATING ACTIVITIES $ 21,837 $ (5,078)
NET CASH USED IN DISCONTINUED OPERATIONS (1,864) (1,893)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equity securities -- (262)
Proceeds from (additions to) notes receivable (283) 193
Business acquisitions, net of cash acquired (8,055) (8,113)
Purchases of property and equipment (8,181) (3,154)
Proceeds from dispositions of property and equipment 32 109
-------- --------
Net cash used in investing activities (16,487) (11,227)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt 42,000 41,600
Proceeds from notes payable and capitalized leases 1,503 438
Payment of bank debt (17,000) (34,402)
Payment of notes payable and capitalized leases (25,656) (8,650)
Proceeds from stock issuances, net 24,860 41,506
Proceeds from exercise of stock options and warrants, net 302 5,040
Other, net (79) (455)
-------- --------
Net cash provided by financing activities 25,930 45,077
-------- --------
Net increase in cash and cash equivalents 29,416 26,879
Cash and cash equivalents at beginning of period 50,885 29,236
Cash and cash equivalents at end of period:
Continuing operations 73,710 51,173
Discontinued operations 6,591 4,942
-------- --------
Cash and cash equivalents at end of period $80,301 $56,115
======== ========
See the accompanying notes to the condensed consolidated financial statements.
5
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, 1999 and December 31,
1998, and the results of their operations and cash flows for the
three-month periods ended March 31, 1999 and 1998. 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 1998 condensed consolidated balance sheet
was derived from Century's audited consolidated balance sheet which has
been restated to include the results of acquisitions accounted for
under the pooling-of-interests method of accounting and 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, 1998.
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 1998 financial
statements to conform to the 1999 presentation.
2. ACQUISITIONS
During the first quarter 1999, the Company continued its strategic
acquisition program, acquiring the businesses of nine complementary
companies. These acquisitions comprised of the following: seven
accounting, tax, valuation and advisory firms and two benefits
administration and insurance firms.
Eight of the acquisitions were accounted for as purchases, and
accordingly, the operating results of the acquired companies have been
included in the accompanying condensed consolidated financial
statements since the dates of acquisition. The aggregate purchase price
of these acquisitions was approximately $13.3 million, excluding future
contingent consideration consisting of restricted common stock and cash
of approximately $6.8 million, 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 companies acquired based
upon their respective fair market values. Goodwill is being amortized
over periods not exceeding forty years. As a result of the nature of
the assets and liabilities of the businesses acquired, there were no
material identifiable intangible assets.
The unaudited pro forma information for the periods set forth below
give effect to the 1999 acquisitions accounted for under the purchase
method of accounting as if they had occurred on January 1, 1999 and
January 1, 1998. The pro forma information is presented for
informational purposes only and is not necessarily indicative of the
results of operations that actually would have been achieved had these
transactions been consummated at the beginning of the periods presented
(in thousands, except per share data):
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, MARCH 31,
1999 1998
---------------------------------------------
Pro forma from continuing operations:
Total revenues $127,544 $71,356
Net income $14,553 $8,033
Earnings per share
Basic $0.19 $0.15
Diluted $0.18 $0.12
6
7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- (continued)
2. ACQUISITIONS (CONTINUED)
Century exchanged approximately 645,000 shares of its common stock for
all of the common stock of an accounting, tax, valuation, and advisory
firm, which was accounted for under the pooling-of-interests method of
accounting for business combinations. Accordingly, Century's financial
statements have been restated to include the results of the pooled
entity for all periods presented.
The aforementioned pooling-of-interests transaction involved an
enterprise that previously had not been subjected to income taxes.
Accordingly, pro forma adjustments have been presented in the financial
statements to reflect the tax effects of the enterprise in prior
periods.
3. CASH AND CASH EQUIVALENTS
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.
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 effect on Century's
financial condition or results of operations.
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. Comprehensive income for the three months ended March 31,
1999 and 1998 was $14.9 million and $8.6 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 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.
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------------------
1999 1998
------------------------ ------------------------
Denominator
Basic
Weighted average common shares 74,625 52,009
------------------------ ------------------------
Diluted
Warrants 6,702 13,556
Options 267 792
Contingent shares 498 -
------------------------ ------------------------
Total 82,092 66,357
======================== ========================
7
8
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- (continued)
7. DISCONTINUED OPERATIONS
In April 1999, Century adopted a formal plan to divest of 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 periods ended March 31,
1999 and 1998 were $11.7 million and $12.6 million, respectively. The
divestiture of the specialty insurance segment is expected to result in
a gain, and the sale is expected to be completed prior to December 31,
1999.
8. SUBSEQUENT EVENTS
Since March 31, 1999, Century completed the acquisition of two benefits
administration and insurance firms, and one information technology
firm. The aggregate purchase price of these acquisitions was
approximately $9.0 million, excluding contingent consideration
consisting of restricted common stock and cash of approximately $4.3
million, which is based on the acquired companies' ability to meet or
exceed certain performance goals. The acquisition of the benefits
administration and insurance firms will be accounted for under the
purchase method of accounting and the acquisition of the information
technology firm is expected to be accounted for under the
pooling-of-interests method of accounting.
9. SEGMENT REPORTING
Century adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," on January 1, 1998. As previously
reported, Century's business units have been aggregated into two
reportable segments: specialty insurance and business services. The
planned divestiture of the specialty insurance segment has reduced the
number of segments to one, and therefore there is no segment
information to report.
8
9
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 throughout the United
States. Century provides integrated services in the following areas: accounting,
tax, valuation, and advisory services; benefits administration and insurance
services; human resources and payroll services; and performance consulting
services.
RESULTS OF OPERATIONS
- ---------------------
Revenues
Business service fees and commissions increased to $125.0 million for
the three-month period ended March 31, 1999, from $66.6 million for the
comparable period in 1998. The increase was attributable to the acquisitions
completed subsequent to the first quarter of 1998 and from internal growth. For
the companies with a full period of operations in 1999 and 1998, Century
achieved an internal growth rate of 15.5%. The increase in revenues also
reflects strong results from the companies that provide accounting and tax
services, which derive a large part of their revenue from business activity in
the first quarter of the year, as well as results from Century's cross-serving
initiatives.
Expenses
Total expenses increased to $100.9 million for the three-month period
ended March 31, 1999, from $55.3 million for the comparable period in 1998. Such
increase was primarily attributable to the increase in operating expenses, which
reflects the impact of Century's acquisitions made subsequent to the first
quarter of 1998. As a percentage of business service fees and commissions, total
expenses decreased to 80.8% for the three-month period ended March 31, 1999,
from 83.0% for the three-month period ended March 31, 1998.
Operating expenses increased to $92.3 million for the three-month
period ended March 31, 1999, from $51.9 million for the comparable period in
1998, primarily due to purchase acquisitions made subsequent to the first
quarter of 1998. As a percentage of business service fees and commissions,
operating expenses decreased to 73.9% at March 31, 1999 from 77.8% for the
comparable period, reflecting operating efficiencies and economies of scale
achieved. The primary components of operating expenses are compensation expense,
occupancy expense, and other operating expenses. Compensation expense increased
due to purchase acquisitions as well as the significant amount of resources
required by the firms that provide tax services, as the first quarter is their
busiest quarter of the year. Occupancy expense and other operating expenses
increased due to additional expense from purchase acquisitions, but decreased as
a percentage of business service fees and commissions by 119 basis points,
representing operating efficiencies gained through successful integration
efforts.
Corporate general and administrative expenses increased to $3.4 million
for the three-month period ended March 31, 1999, from $1.5 million for the
comparable periods in 1998. Such increase was attributable to the expansion of
the corporate function to accommodate Century's infrastructure, corporate
initiatives, and integration costs. Significant costs associated with the
following corporate initiatives were incurred in the first quarter of 1999:
certain costs associated with the enterprise-wide solution to integrate back
office operations, and costs incurred associated with Century's national
cross-serving meetings. Corporate general and administrative expenses
represented 2.8% and 2.3% of total revenues for the three-month periods ended
March 31, 1999 and 1998.
Merger and acquisitions costs increased to $1.2 million for the
three-month period ended March 31, 1999, from $3,000 for the comparable period
in 1998. Merger and acquisition costs are comprised primarily of professional
fees incurred in transactions accounted for as pooling-of-interests and the
salaries of employees dedicated to those merger activities. The increase is due
to the build out of the mergers and acquisitions department throughout 1998
resulting in the full utilization of the department in 1999, as well as costs
associated with the pooling-of-interests transaction in 1999.
Depreciation and amortization expenses increased to $4.2 million for
the three-month period ended March 31, 1999 from $2.1 million for the comparable
period in 1998. The increase is primarily a result of the increase of goodwill
amortization resulting from the forty-nine acquisitions completed by Century
subsequent to the first quarter of 1998. As a percentage of total revenues,
depreciation and amortization expense was 3.4% and 3.2% for the three-month
period ended March 31, 1999 and 1998, respectively.
9
10
Century recorded income taxes from continuing operations of $9.5
million ($9.6 on a pro forma basis) for the three-month period ended March 31,
1999 compared to $3.9 million ($4.2 million on a pro forma basis) for the
comparable period in 1998. The effective tax rate increased to 39.4% (40.0% on a
pro forma basis) for the three-month period ended March 31, 1999 from 34.0%
(37.0% on a pro forma basis) for the comparable period. Income taxes are
provided based on Century's anticipated annual effective rate.
OTHER
- -----
Total assets increased to $636.0 million at March 31, 1999, from $543.2
million at December 31,1998, primarily attributable to purchase acquisitions
completed in the first quarter of 1999. Of the $92.8 million increase in total
assets, the significant increases in assets include cash and cash equivalents of
$30.8 million, accounts receivable of $37.0 million, and goodwill of $17.1
million. Total liabilities increased approximately $42.9 million, primarily due
to the increase in accrued expenses and other liabilities related to cash
deposited from clients (see - "Liquidity and Capital Resources"), while total
debt remained relatively consistent. Total shareholders' equity increased $49.9
million due to net income for the first quarter of 1999 of $15.3 million,
proceeds from the investment of $25 million by an outside investor, the proceeds
from the exercise of options and warrants, and business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the three month period ended March 31, 1999, cash and cash
equivalents increased $29.4 million to $80.3 million, from $50.9 million at
December 31, 1998, as cash provided by continuing operating activities of $21.8
million and financing activities of $25.9 million exceeded cash used in
investing activities of $16.5 million and cash used in discontinued operations
of $1.8 million. The increased in total cash is primarily attributable to $29
million in cash deposited from clients, which is restricted from operating cash
and has been offset by accrued liabilities that will be settled with the cash
from these clients.
Cash used in investing activities from continuing operations consisted
primarily of cash used in business acquisitions and purchases of property and
equipment. Significant purchases of property and equipment in the first quarter
of 1999 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, 1999, cash provided by financing
activities consisted primarily of proceeds of $25.2 million from stock issuances
and exercises of stock options and warrants, proceeds from the revolving credit
facility of $42 million, and repayment of bank debt, notes payable, and capital
leases. The primary source of cash from stock issuances resulted from the $25
million investment in Century by an outside investor, in exchange for 1.8
million restricted shares of common stock and 900,000 warrants. 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 which may be exercised under the
following terms: 300,000 shares for 3 years at $20 per share; 300,000 shares for
4 years at $25 per share; and 300,000 shares for 5 years at $30 per share. The
proceeds from these financing activities were used for general corporate
purposes, working capital requirements, repayment of debt, and the cash portion
of business acquisitions.
During 1998, Century received net proceeds of $47.7 million from a private
placement of 3.8 million shares, of which $41.5 million was received during the
three months ended March 31, 1998. Cash provided by financing activities
consisted primarily of net proceeds received from this private placement, which
together with warrants exercised, raised approximately $46.5 million during the
three months ended March 31, 1998. The proceeds from stock issuances, together
with the proceeds from the revolving credit facility of $41.6 million, were used
for repayment of debt and notes payable.
YEAR 2000
- ---------
To minimize or eliminate the effect of the Y2K risk on our business systems
and applications, we are continually identifying, evaluating, implementing and
testing our computer systems, applications and software in order to achieve Y2K
compliance. Century implemented a Y2K Compliance Project in March 1998 that has
been adopted by all of our subsidiaries. As part of this initiative, we have
identified key contact individuals within each subsidiary to identify, evaluate
and implement a plan to bring all of our business systems and applications into
Y2K compliance by June 30, 1999. Century's Y2K Compliance Project consists of
four phases: (i) inventory and assessment of all business systems and
applications subject to Y2K risk; (ii) identification of such business systems
and applications to determine the method of correcting any Y2K problems (ready
now, repair, reconcile, replace or retire); (iii)
10
11
remediation and testing of all business systems and applications that have Y2K
problems; and (iv) implementation of corrective measures and certification of
Y2K compliance through internal and external audits. We have completed the
inventory and assessment phase and have identified and assessed seven areas of
risk: a) internally developed business applications; b) third party vendor
software, such as business applications, operating systems and special function
software; c) computer hardware components; d) networks and network related
equipment; e) telecommunications systems and associated equipment, such as
phones and PBX switches; f) Century's own products and services that are
software based; and g) embedded technology, such as microchips and security
systems, that may jeopardize operations. Although we cannot be certain, we
believe substantially that all our all systems, applications and related
software that are subject to Y2K compliance risk have been identified and that
all actions were or are currently being taken to complete remediation on time.
The implementation and verification phase is expected to be complete by June 30,
1999, with inter-dependency testing complete by October 1, 1999.
We rely on third-party service providers for services such as
telecommunications, internet service and components for our business systems and
other key services. Interruption of those services due to Y2K issues could
affect our operations. Thus, we have initiated an evaluation of the status of
such third-party service providers' efforts to determine alternative and
contingency requirements. Development of a template for contingency planning was
completed and disseminated to the subsidiaries of Century in April. The
subsidiaries and the corporate office will submit and consolidate their
contingency plans in August. Century's Y2K Contingency Plan will supplement
disaster recovery plans already in place. While approaches to reducing risks of
interruption of business operations vary by subsidiary, options in Century's Y2K
Contingency Plan include measures such as identification of alternative service
providers, new channels of distribution, and backup manual procedures.
We are continuing to review the potential overall impact of Y2K risks
on our business, financial condition and results of operations. To date, we have
not encountered any material Y2K problems with our computer systems, networks,
and other related equipment. We expect to incur $3 to $4 million in capital
expenditures in 1999 with respect to system upgrades which are designed in part
to address specific Y2K requirements. One of the reasons that the number Y2K
remediation has increased is due to our continued growth through acquisitions.
We do not expect expenditures incurred after 1999 for Y2K compliance to be
significant.
We cannot assure you that our systems or the systems of other
companies on which our systems rely on or are interconnected will be timely
installed or converted. Major efforts are in place to ensure that our own
systems, the systems of our key partners and suppliers and our strategic
customers are Y2K compliant, along with the communication links between all of
them. Although we are not certain of the impact on us of the failure of our
significant customers, partners or vendors to achieve Y2K compliance in a timely
or effective manner, such failure could adversely affect our business and
results of operations.
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) risk of professional errors and omissions;
(vii) the nature of the competitive and fragmented outsourcing industry; (viii)
year 2000 noncompliance may cause operational problems; (ix) market fluctuations
in the values or returns on assets in Century's investment portfolios; (x)
government regulations and interpretations are subject to changes; (xi)
Century's principal shareholders have substantial control over its operations;
(xii) shares eligible for future sale could adversely affect the price of
Century's common stock; (xiii) Century may not pay dividends; and (xiv)
Century's ability to manage risks associated with its 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.
11
12
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
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 issued no debt instruments, entered into no forward or futures
contracts, purchased no options and entered into no 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 2. CHANGES IN SECURITIES
(d) Issuance of shares during the three months ended March 31, 1999, were as
follows:
Century sold 1,785,714 shares of common stock and 900,000 warrants to
purchase common stock under a Purchase Agreement dated March 5, 1999, pursuant
to a Registration Statement on Form S-3 (No. 333-40331), registering up to
$125,000,000 of Century's securities, including common stock, par value $0.01
per share, which became effective on December 12, 1997. The offering was not
underwritten.
The aggregate offering price for the common stock and warrants was
$25,000,000; net proceeds received was approximately $24,975,000, after
deducting issuance costs. The net proceeds will be added to Century's general
funds to be used for general corporate purposes, working capital requirements,
and the cash portion of acquisitions.
12
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed
during the quarter ended March 31, 1999.
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 14, 1999 By: /s/ Charles D. Hamm, Jr.
-------------------- -------------------------------
Charles D. Hamm, Jr.
Chief Financial Officer
13
14
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
EXHIBIT INDEX
-------------
Exhibit Number:
---------------
27.1 Financial Data Schedule (SEC only)...................15
14
5
1,000
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
73,710
324
162,595
8,397
0
281,291
47,700
13,436
635,951
81,484
0
0
0
765
445,300
635,951
0
124,978
0
92,325
8,805
0
(209)
24,057
9,490
14,567
706
0
0
15,273
.21
.19
