<PAGE> 1
FILED PURSUANT TO RULE 424(b)4
REGISTRATION NO. 333-32739
PROSPECTUS
AUGUST 20, 1997
2,600,000 SHARES
[CBSI LOGO]
COMMON STOCK
Of the 2,600,000 shares of Common Stock being offered hereby, 1,450,000
shares are being sold by Complete Business Solutions, Inc. ("CBSI" or the
"Company") and 1,150,000 shares are being sold by the Selling Shareholders. See
"Principal and Selling Shareholders." The Company will not receive any part of
the proceeds from the sale of shares by the Selling Shareholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"CBSL." On August 19, 1997, the last reported sale price of the Common Stock was
$28 3/4 per share. See "Price Range of Common Stock."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $28.25 $1.62 $26.63 $26.63
Total(3)................ $73,450,000 $4,223,375 $38,607,156 $30,619,469
</TABLE>
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses, estimated at $850,000, which will be paid by the
Company.
(3) The Company and the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to 390,000 additional shares of Common Stock at
the Price to the Public, less Underwriting Discounts and Commissions, solely
to cover over-allotments, if any. If such option is exercised in full,
217,500 of such shares will be sold by the Company and 172,500 shares will
be sold by the Selling Shareholders. The total Price to the Public,
Underwriting Discounts and Commissions, Proceeds to the Company and Proceeds
to the Selling Shareholders will be $84,467,500, $4,856,881, $44,398,230 and
$35,212,389, respectively. The Company will not receive any of the proceeds
from the sale of shares of Common Stock by the Selling Shareholders pursuant
to the Underwriters' over-allotment, if exercised. See "Principal and
Selling Shareholders" and "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the share certificates will be made in New
York, New York, on or about August 25, 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
LEGG MASON WOOD WALKER
INCORPORATED
<PAGE> 2
APECS(R) is a registered trademark of the Company. COSMO(SM) and The Time
Machine 2000(SM) are service marks of the Company. All trademarks, service marks
and trade names referred to in this Prospectus are the property of their
respective owners.
------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Consolidated and Unaudited Condensed Consolidated Financial Statements and
related Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information contained in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised. Per share data for periods
prior to March 5, 1997 have been adjusted to give retroactive effect to the
conversion by JF Electra (Mauritius) Limited ("JF Electra") of its shares of
common stock in CBS Complete Business Solutions (Mauritius) Limited ("CBS
Mauritius") into 552,632 shares of no par value common stock of the Company (the
"Common Stock"). Unless otherwise indicated, the terms "Company" and "CBSI"
refer collectively to Complete Business Solutions, Inc. and its subsidiaries.
THE COMPANY
CBSI is a worldwide provider of information technology ("IT") services to
large and mid-size organizations. The Company offers its clients a broad range
of IT services, from advising clients on strategic technology plans to
developing and implementing appropriate IT applications solutions. CBSI offers
custom-tailored solutions based on an assessment of each client's needs. The
Company's services include: (i) Year 2000 conversion and testing services; (ii)
large systems applications development and maintenance; (iii) reengineering
legacy applications to client/server technology; (iv) client/server applications
development; (v) IT consulting services; (vi) packaged software implementation;
and (vii) contract programming services.
CBSI provides services in a wide variety of computing environments and uses
leading technologies, including Year 2000 tools, client/server architectures,
object-oriented programming languages and tools, distributed database management
systems, and the latest network and communications technologies. The Company
believes that the breadth of its service offerings foster long-term client
relationships, affords cross-selling opportunities, minimizes dependence on any
single technology or client and enables the Company to serve as a single source
provider for its clients' IT applications solutions. This single or preferred
provider approach is consistent with CBSI's full life-cycle, client-oriented
approach to IT solutions.
CBSI provides IT services to clients in a diverse range of industries. Its
clients include American President Lines, Chrysler Corporation, Citibank, Ford
Motor Company, IBM, IBM Global Solutions/Foremost Insurance, Lands' End, the
State of Indiana, the State of Nevada, S.W.I.F.T., Spartan Stores and UNUM Ltd.
During 1996, the Company provided services to over 220 clients in the U.S.,
Europe and Asia. The Company's strategy is to maximize its client retention rate
and secure additional engagements by providing both quality services and client
responsiveness. For each of the fiscal years 1994, 1995, and 1996, and for the
six-month period ended June 30, 1997, existing clients from the previous fiscal
year generated at least 80% of the Company's revenues. These recurring revenues
have contributed significantly to the Company's 29% compound annual revenue
growth rate over the past five fiscal years.
Since 1992, CBSI has developed an extensive offshore infrastructure in
India, including two modern software development centers in Bangalore and Madras
and a training center in Hyderabad. The Company believes this established
offshore infrastructure is one of the largest in the industry and differentiates
it from those competitors who have no offshore capability, have only recently
established offshore capability or rely mostly on contract service providers to
offer such services. With its offsite and offshore development options, the
Company can quickly provide clients with IT applications solutions on a
cost-effective basis.
The Company's goal is to become the preferred provider of IT services to an
expanding base of clients. The Company's strategy to achieve this goal is to:
(i) cross-sell services to existing clients; (ii) increase and build upon Year
2000 engagements; (iii) capitalize on significant investments in infrastructure
and increase its international capabilities; (iv) expand service offerings such
as Enterprise Resource Planning software package installation and
Internet/intranet applications; and (v) pursue targeted acquisitions.
3
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......................... 1,450,000 shares
Common Stock offered by the Selling Shareholders............ 1,150,000 shares
Common Stock to be outstanding after the offering........... 10,785,000 shares(1)
Use of proceeds............................................. Expansion of existing operations,
including the Company's offshore
software development operations;
development of new service lines and
possible acquisitions of related
businesses; and general corporate
purposes, including working capital.
Nasdaq National Market symbol............................... CBSL
</TABLE>
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(1) Excludes: (i) options outstanding on the date hereof to purchase 617,368
shares of Common Stock at a weighted average exercise price of $9.23 per
share; and (ii) 466,266 additional shares of Common Stock reserved for
issuance upon exercise of options that may be granted in the future under
the Company's 1996 Stock Option Plan. See "Management -- Employee Benefit
Plans."
4
<PAGE> 5
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF INCOME
DATA:
Revenues......................... $32,382 $43,795 $56,358 $67,399 $83,241 $39,548 $50,937
Gross profit..................... 7,159 10,290 13,522 13,790 19,939 9,746 13,540
Income from operations........... 1,410 1,937 2,635 1,966 4,484 2,515 4,155
Interest expense (income)........ 185 197 345 692 539 300 (378)
Provision for income taxes....... -- -- -- -- 84 36 1,991
Minority interest................ 36 127 176 252 158 113 82
Net income....................... $ 1,189 $ 1,613 $ 2,114 $ 1,022 $ 3,703 $ 2,066 $ 2,460
PRO FORMA STATEMENT OF INCOME DATA:
Revenues................................................................ $83,241 $39,548 $50,937
Gross profit............................................................ 19,939 9,746 13,540
Income from operations(1)............................................... 4,337 2,442 4,131
Interest income(2)...................................................... (71) (11) (431)
Provision for income taxes(3)........................................... 1,582 881 1,440
Net income(4)........................................................... $ 2,826 $ 1,572 $ 3,122
Net income per common share............................................. $ 0.34 $ 0.19 $ 0.36
Weighted average shares outstanding(5).................................. 8,213 8,130 8,712
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED(6)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $17,763 $55,520
Working capital................................................................... 27,512 65,269
Total assets...................................................................... 48,778 86,535
Total shareholders' equity........................................................ 35,521 73,278
</TABLE>
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(1) Reflects the amortization of goodwill over a period of 20 years as a result
of the Company's purchase of the 28% minority interest in CBS Mauritius. See
Notes 1 and 16 of Notes to Consolidated Financial Statements.
(2) Reflects the elimination of interest expense to give effect to the repayment
of the Company's revolving credit facility and long-term debt. See Note 16
of Notes to Consolidated Financial Statements.
(3) Reflects provision for federal and state income taxes at the effective
income tax rate as if the Company had been taxed as a C corporation and no
foreign tax holidays had been granted during the periods presented. The
effective tax rate was 35.9%, 35.9% and 31.6% for the fiscal year ended
December 31, 1996, and the six-month periods ended June 30, 1996 and 1997,
respectively.
(4) Reflects the elimination of minority interest due to the issuance of 552,632
shares of Common Stock in exchange for the minority interest in CBS
Mauritius. See Notes 1 and 16 of Notes to Consolidated Financial Statements.
(5) Reflects pro forma weighted average shares of Common Stock, plus the portion
of the Common Stock sold in the Company's initial public offering needed to
generate proceeds sufficient to repay the Company's revolving credit
facility and long-term debt at the end of each period.
(6) Adjusted to give effect to the sale of 1,450,000 shares of Common Stock by
the Company offered hereby at the public offering price of $28 1/4 per
share, net of underwriting discounts and commissions and estimated costs of
this offering.
5
<PAGE> 6
RISK FACTORS
RECRUITMENT AND RETENTION OF IT PROFESSIONALS
The Company's business involves delivering IT services and is
labor-intensive. The Company's success depends upon its ability to attract,
develop, motivate and retain highly-skilled IT professionals and project
managers possessing the technical skills and experience necessary to deliver the
Company's services. Qualified IT professionals are in high demand worldwide and
are likely to remain a limited resource for the foreseeable future. There can be
no assurance that qualified IT professionals will continue to be available to
the Company in sufficient numbers, or that the Company will be successful in
retaining current or future employees. Failure to attract or retain qualified IT
professionals in sufficient numbers could have a material adverse effect on the
Company's business, operating results and financial condition. Historically, the
Company has conducted a significant portion of its recruiting outside the
countries where the client's work was performed. Accordingly, any perception
among the Company's IT professionals, whether or not well founded, that the
Company's ability to assist them in obtaining H-1B temporary work permits and
permanent residency status has diminished could lead to significant employee
attrition which could result in the Company incurring increased costs for IT
professionals. See "Business -- Human Resources" and "Business -- Competition."
GOVERNMENT REGULATION OF IMMIGRATION
The Company recruits its IT professionals on a global basis to create a
workforce that it can deploy wherever required and, therefore, must comply with
the immigration laws in the countries in which it operates, particularly the
United States. As of June 30, 1997, approximately 41% of CBSI's worldwide
workforce was working under H-1B temporary work permits in the United States.
There is a limit on the number of new H-1B permits that may be approved in a
fiscal year. In years in which this limit is reached, the Company may be unable
to obtain enough H-1B permits to meet its personnel requirements. If the Company
were unable to obtain H-1B permits for its employees in sufficient quantities or
at a sufficient rate, the Company's business, operating results and financial
condition could be materially and adversely affected. Furthermore, Congress and
administrative agencies with jurisdiction over immigration matters have
periodically expressed concerns over the levels of legal and illegal immigration
into the U.S. These concerns have often resulted in proposed legislation, rules
and regulations aimed at reducing the number of work permits that may be issued.
Any changes in such laws and regulations making it more difficult to hire
foreign nationals or limiting the ability of the Company to retain foreign
employees, could require the Company to incur additional unexpected labor costs
and other expenses. Any such restrictions or limitations on the Company's hiring
practices could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Human Resources."
INCREASING SIGNIFICANCE AND RISKS OF NON-U.S. OPERATIONS
The Company's international consulting and offshore software development
operations are important elements of its growth strategy. The Company opened
offices in the United Kingdom in 1990, in Madras, India in 1992, in Bangalore,
India in 1995 and in Hyderabad, India in 1996. The international operations of
the Company accounted for 4.7%, 6.8%, 6.9% and 9.6% of the Company's total
revenues in fiscal years 1994, 1995, and 1996, and for the six-month period
ended June 30, 1997, respectively. These operations depend greatly upon business
and technology transfer laws in those countries, and upon the continued
development of technology infrastructure. There can be no assurance that the
Company's international operations will continue to be profitable or support the
Company's growth strategy. The risks inherent in the Company's international
business activities include unexpected changes in regulatory environments,
foreign currency fluctuations, tariffs and other trade barriers, difficulties in
managing international operations and potential foreign tax consequences,
including repatriation of earnings and the burden of complying with a wide
variety of foreign laws and regulations. The Company's failure to manage growth,
attract and retain personnel, manage major development efforts, or profitably
deliver services or a significant interruption in the Company's ability to
transmit data via satellite, could have a material adverse impact on the
Company's ability to maintain and
6
<PAGE> 7
develop successfully its international operations and could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- CBSI Growth Strategies."
The Company's international operations are subject to a number of special
risks, including currency exchange rate fluctuations, trade barriers, exchange
controls, political risks and risk of increases in duties, taxes and
governmental royalties, as well as changes in laws and policies governing
operations of foreign-based companies.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including
the timing and number of client projects commenced and completed during the
quarter, the number of working days in a quarter, employee hiring, attrition and
utilization rates and progress on fixed-price projects during the quarter.
Because a high percentage of the Company's expenses, in particular personnel and
facilities costs, are relatively fixed, a variation in revenues may cause
significant variations in operating results. Additionally, the Company
periodically incurs cost increases due to both the hiring of new employees and
strategic investments in its infrastructure in anticipation of future
opportunities for revenue growth. No assurances can be given that quarterly
results will not fluctuate, causing a material adverse effect on the Company's
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results."
POTENTIAL DECREASE IN DEMAND FOR YEAR 2000 SERVICES
The Company realized 7% and 9% of its total revenues from Year 2000
engagements during fiscal year 1996 and the six-month period ended June 30,
1997, respectively. The Company expects that it will continue to receive
increased revenues from additional Year 2000 engagements in the near term.
However, the Company expects that Year 2000 engagements and revenues derived
from such engagements will peak prior to calendar year 2000 as companies address
their needs. Thereafter, the Company expects that revenues derived from Year
2000 engagements will steadily decline. In the absence of additional revenues
from other sources, a decline in such engagements could have a material adverse
effect on the Company's business, operating results and financial condition.
EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN INDIA
A significant element of the Company's business strategy is to continue to
develop its offshore software development centers in Bangalore and Madras,
India. As of June 30, 1997, the Company had approximately 30% of its workforce
in India. The Indian government, as a means of encouraging foreign investment,
provides significant tax incentives and exemptions to regulatory restrictions.
Certain of these benefits that directly affect the Company include, among
others, tax holidays (temporary exemptions from taxation on operating income)
and liberalized import and export duties. To be eligible for certain of these
tax benefits, the Company must continue to meet certain conditions. A failure to
meet such conditions in the future could result in the cancellation of the
benefits. There can be no assurance that such tax benefits will be continued in
the future at their current levels. With respect to duties, subject to certain
conditions, goods, raw materials and components for production imported by the
Company's offices in India are exempt from the levy of a customs duty.
Although wage costs in India are significantly lower than in the U.S. and
elsewhere for comparably skilled IT professionals, wages in India are increasing
at a faster rate than in the U.S. In the past, India has experienced significant
inflation and shortages of foreign exchange, and has been subject to civil
unrest and acts of terrorism. Although the inflation rate for the periods
discussed in this Prospectus has been insignificant, increases in inflation in
the future could have a material adverse effect on the Company's business,
operating results and financial condition. Additionally, changes in interest
rates, taxation or other social, political, economic or diplomatic developments
affecting India in the future could also have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business -- The CBSI Solution."
7
<PAGE> 8
FIXED-PRICE PROJECTS
The Company undertakes certain projects on a fixed-price basis, as
distinguished from billing on a time-and-materials basis. Significant cost
overruns on fixed-price projects could have a material adverse effect on the
Company's business, operating results and financial condition. These risks may
be heightened if the Company acts as a subcontractor on a fixed-price project
because of its limited ability to control project variables and to negotiate
directly with the ultimate client. For example, in 1994 and 1995, the Company
provided services as a subcontractor on a fixed-price project to design and
develop a human services and child support enforcement system for a state
government. The Company incurred approximately $3.0 million in excess personnel
costs, primarily in 1995, to meet the demands of this project and the Company's
overall gross profit margin therefore declined from 24% in 1994 to 21% in 1995.
Excluding the excess costs associated with this project, the Company's gross
profit margins would have remained constant from 1994 to 1995. Although the
Company intends to solicit fewer fixed-price project engagements in the future,
there can be no assurance that any fixed-price project engagements that are
accepted by the Company will be profitable. Failure to achieve profitability on
any fixed-price project engagement could have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
COMPETITION
The IT services industry is highly competitive and served by numerous
national, regional and local firms, all of which are either existing or
potential competitors of the Company. Primary competitors include Cambridge
Technology Partners, Information Management Resources, Inc., Keane, Inc. and
participants within a variety of market segments, including "Big Six" accounting
firms, implementation firms, software applications firms, service groups of
computer equipment companies, general management consulting firms, programming
companies and temporary staffing firms. Many of these competitors have
substantially greater financial, technical and marketing resources and greater
name recognition than the Company. In addition, there are relatively few
barriers to entry into the Company's markets and the Company has faced, and
expects to continue to face, additional competition from new entrants into its
markets. Moreover, there is a risk that clients may elect to increase their
internal IT resources to satisfy their applications solutions needs. Further,
the IT services industry is undergoing consolidation which may result in
increasing pressure on margins. These factors may limit the Company's ability to
increase prices commensurate with increases in compensation. There can be no
assurance that the Company will compete successfully with existing or new
competitors. See "Business -- Competition."
CONCENTRATION OF REVENUES; RISK OF TERMINATION
The Company's ten largest clients accounted for approximately 49% and 51%
of revenues in fiscal year 1996 and for the six-month period ended June 30,
1997, respectively. International Business Machines and its affiliates ("IBM")
accounted for approximately 12% and 9% of the Company's revenues in fiscal year
1996 and for the six-month period ended June 30, 1997, respectively. Revenues
from IBM are generated by multiple projects for various end users. Most of the
Company's projects are terminable by the client without penalty. An
unanticipated termination of a major project could result in the loss of
revenues and could require the Company to maintain or terminate a number of
unassigned IT professionals. The loss of any significant client or project could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Clients."
MANAGEMENT OF GROWTH; CHANGING NATURE OF BUSINESS
The Company has experienced rapid growth that has placed significant
demands on the Company's managerial, administrative and operational resources.
Revenues have grown from $32.4 million in fiscal year 1992 to $83.2 million in
fiscal year 1996, and the number of employees has grown from 480 as of December
31, 1992 to 1,632 as of June 30, 1997. The Company's continued growth depends on
its ability to recruit managers, to increase its international operations, to
add service lines and to further expand its offshore facilities. Prior to March
5, 1997, no members of senior management had previously managed a public
8
<PAGE> 9
company. Effective management of growth initiatives will require the Company to
continue to improve its operational, financial and other management processes
and systems. Failure to manage growth effectively could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- CBSI Growth Strategies."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
The IT industry is characterized by rapid technological change, evolving
industry standards, changing client preferences and new product introductions.
The Company's success will depend in part on its ability to develop IT solutions
that keep pace with changes in the IT industry. There can be no assurance that
the Company will be successful in addressing these developments on a timely
basis or that, if these developments are addressed, the Company will be
successful in the marketplace. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
services noncompetitive or obsolete. The Company's failure to address these
developments could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- The IT Services
Industry."
A significant number of organizations are attempting to migrate business
applications from a mainframe environment to advanced technologies, including
client/server architectures. As a result, the Company's ability to remain
competitive will be dependent on several factors, including its ability to help
existing employees maintain or develop mainframe skills and to train and hire
employees with skills in advanced technologies. The Company's failure to hire,
train and retain employees with such skills could have a material and adverse
impact on the Company's business. See "Business -- Human Resources." The
Company's ability to remain competitive will also be dependent on its ability to
design and implement, in a timely and cost-effective manner, effective
transition strategies for clients moving from the mainframe environment to
client/server or other advanced architectures. The failure of the Company to
design and implement such transition strategies in a timely and cost-effective
manner could have a material adverse effect on the Company's business. See
"Business -- The IT Services Industry."
DEPENDENCE ON PRINCIPALS
The success of the Company is highly dependent on the efforts and abilities
of Rajendra B. Vattikuti and Timothy S. Manney, the Company's President and
Chief Executive Officer, and Executive Vice President of Finance and
Administration, respectively. Messrs. Vattikuti and Manney have entered into
employment agreements with the Company of five and three years, respectively.
Such agreements contain noncompetition covenants that extend for a period of one
year following termination of employment and nondisclosure covenants. However,
such agreements do not guarantee that Messrs. Vattikuti and Manney will continue
their employment with the Company or that such covenants will be enforceable.
The loss of the services of either of these key executives for any reason could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company maintains key-man life insurance on Mr.
Vattikuti in the amount of $2.0 million. In the event of Mr. Vattikuti's death,
that sum would be paid to the Company to offset the financial effect of his
death. No assurance can be given, however, that such amount of insurance would
be adequate for that purpose. See "Management -- Executive Officers and
Directors."
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may expand its operations through the acquisition of additional
businesses. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into the Company without substantial expenses, delays or
other operational or financial problems. Further, acquisitions may involve a
number of special risks, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events or circumstances, legal
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Company's business, operating
results and financial condition. Client satisfaction or performance problems
within an acquired firm could have a material adverse impact on the reputation
of the Company as a whole. In addition, there can be no assurance that acquired
businesses, if any, will achieve anticipated revenues and earnings. The failure
of the Company to manage its acquisition strategy
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<PAGE> 10
successfully could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company may issue
additional shares of its Common Stock to acquire such additional businesses
which may reduce the percentage ownership of existing shareholders. See
"Business -- CBSI Growth Strategies."
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part upon certain methodologies it
utilizes in designing, developing and implementing applications systems and
other proprietary intellectual property rights. The Company has developed and
owns proprietary rights for The Time Machine 2000 and COSMO methodologies under
common law. Although such ownership may enable the Company to contest the use by
its competitors of its methodologies, no assurance can be given that the Company
will be successful in doing so. Copyrights to such methodologies have not been
registered. This lack of protection may impair the Company's ability to protect
The Time Machine 2000 and COSMO methodologies and could have a material and
adverse effect on the Company's business. The Company also owns service marks
for The Time Machine 2000 and COSMO and has submitted federal trademark
applications for each. The Company has also developed and copyrighted or
acquired software products which are generally licensed to users pursuant to a
license agreement. The Company's software products include APECS, APECS Custom
View and Micro APECS Scheduler. APECS is a registered trademark of the Company.
The Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company enters into confidentiality
agreements with its employees and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use of and
take appropriate steps to enforce its intellectual property rights. In addition,
the laws of certain foreign countries in which the Company's products are, or
may be, developed or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the U.S. This lack of
protection may impair the Company's ability to protect its intellectual property
adequately and could have a material adverse impact on the Company's business.
Although the Company does not believe that its products infringe on the rights
of third parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future, or that such assertions
will not result in costly litigation or require the Company to obtain a license
for the intellectual property rights of third parties. There can be no assurance
that such licenses will be available on reasonable terms or at all. See
"Business -- The CBSI Solution" and "Business -- Intellectual Property Rights."
LIMITED TRADING HISTORY OF COMMON STOCK; STOCK PRICE VOLATILITY
The Common Stock first became publicly traded on March 5, 1997 after the
Company's initial public offering at $12 per share. Between March 5, 1997 and
August 19, 1997, the closing sale price has ranged from a low of $8 3/4 per
share to a high of $32 3/8 per share. The market price of the Common Stock could
continue to fluctuate substantially due to a variety of factors, including
quarterly fluctuations in results of operations, adverse circumstances affecting
the introduction or market acceptance of new products and services offered by
the Company, announcements of new products and services by competitors, changes
in the IT environment, changes in earnings estimates by analysts, changes in
accounting principles, sales of Common Stock by existing holders, loss of key
personnel and other factors. The market price for the Company's Common Stock may
also be affected by the Company's ability to meet analysts' expectations, and
any failure to meet such expectations, even if minor, could have a material
adverse effect on the market price of the Company's Common Stock. In addition,
the stock market is subject to extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
these companies. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Any such litigation instigated against
the Company could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Price Range
of Common Stock."
10
<PAGE> 11
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of this offering, Mr. Vattikuti will beneficially own
approximately 47.2% of the outstanding shares of Common Stock. As a result, Mr.
Vattikuti will retain the voting power to exercise significant control over the
election of directors and other matters requiring a vote of the shareholders of
the Company. Such a concentration of ownership may have the effect of delaying
or preventing a change in control of the Company, and may also impede or
preclude transactions in which shareholders might otherwise receive a premium
for their shares over then current market prices. See "The Company,"
"Management -- Executive Officers and Directors" and "Principal and Selling
Shareholders."
LIMITATIONS ON DIRECTORS' LIABILITIES
The Company's Restated Articles of Incorporation, as amended (the
"Articles"), provide that, to the full extent permitted by law, a director of
the Company will not be personally liable to the Company or its shareholders for
damages for breach of fiduciary duty as a director. This provision would
ordinarily eliminate the liability of directors for monetary damages to the
Company and its shareholders even in instances in which the directors had been
negligent or grossly negligent. Under the Michigan Business Corporation Act
("MBCA"), a director's liability may not be limited: (i) for any breach of the
director's duty of loyalty to the Company or its shareholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) for a violation of Section 551(1) of the MBCA; (iv) for
any transaction from which the director derived any improper personal benefit;
or (v) for any act or omission occurring prior to the date when the provision
becomes effective.
ANTI-TAKEOVER PROVISIONS
The Company's Articles and Bylaws and the MBCA include provisions that may
be deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that shareholders might consider in their best interests.
Directors of the Company are divided into three classes and are elected to serve
staggered three-year terms. The Articles provide for 1,000,000 authorized shares
of preferred stock, the rights, preferences, qualifications, limitations and
restrictions of which may be fixed by the Board of Directors without any vote or
action by the shareholders, which could have the effect of diluting the Common
Stock or reducing working capital that would otherwise be available to the
Company. Chapter 7A of the MBCA provides, with certain exceptions, that business
combinations between a Michigan corporation and an "interested shareholder"
generally require the approval of 90% of the votes of each class of stock
entitled to be cast by the shareholders of the corporation, and not less than
2/3 of the votes of each class of stock entitled to be cast by the shareholders
of the corporation other than voting shares owned by such interested
shareholder. An "interested shareholder" is a person directly or indirectly
owning 10% or more of a corporation's outstanding voting power, or an affiliate
of a corporation who at any time within two years prior to the date in question
directly or indirectly owned 10% or more of such voting power. These provisions
may have the effect of delaying or preventing a change in control of the Company
without action by the shareholders, may discourage bids for the Common Stock at
a premium over the market price and may deter efforts to obtain control of the
Company.
Chapter 7B of the MBCA provides that "control shares" of a corporation
acquired in a control share acquisition have no voting rights except as granted
by the shareholders of the corporation. "Control shares" are shares which, when
added to shares then owned or controlled by a shareholder, increase such
shareholder's control of voting power above one of three thresholds: more than
20%, more than 33 1/3% or more than a majority of the outstanding voting power
of the corporation. Subject to certain limited exceptions, voting rights for
shares acquired in a control share acquisition must be approved by a majority of
the votes cast by holders of shares entitled to vote, excluding shares voted or
controlled by the acquiror and certain officers and directors. Under certain
circumstances, if a corporation's articles of incorporation or bylaws so provide
prior to a control share acquisition, control shares may be redeemed by the
corporation. Unless otherwise provided in a corporation's articles of
incorporation or bylaws, if control shares are accorded full voting rights and
the acquiring person has acquired a majority of all voting power of the
corporation, the shareholders of the corporation, other than the acquiring
person, have dissenters' rights to have their shares purchased by the
11
<PAGE> 12
corporation. The Articles and Bylaws of the Company currently contain no
provisions with respect to control shares.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of this offering, the Company will have
10,785,000 shares of Common Stock outstanding, of which the 2,600,000 shares
sold pursuant to this offering as well as the 2,500,000 shares sold in the
initial public offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for 30,940 shares purchased in the open market by affiliates and
any additional shares acquired by affiliates of the Company. Holders of the
remaining shares will be eligible to sell such shares pursuant to Rule 144
("Rule 144") under the Securities Act at prescribed times and subject to the
manner of sale, volume, notice and information restrictions of Rule 144. The
Company has granted certain registration rights covering an aggregate of 425,832
shares of currently issued and outstanding Common Stock (416,082 shares if the
Underwriters' over-allotment option is exercised in full). In addition, 617,368
shares of Common Stock (44,231 of which are currently exercisable) are issuable
upon the exercise of outstanding stock options, which shares will be registered
by the Company under the Securities Act and after issuance upon exercise will be
freely tradeable without restriction. The Company, together with certain of its
shareholders (holding in the aggregate 5,701,679 shares of Common Stock upon
consummation of this offering), have agreed not to offer, sell, contract to sell
or otherwise dispose of, directly or indirectly, any Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock or
exercise registration rights, until 90 days after the date of this Prospectus,
without the prior consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Sales of substantial amounts of such shares in the public market or
the availability of such shares for future sale could adversely affect the
market price of the shares of Common Stock and the Company's ability to raise
additional capital at a price favorable to the Company. See "Shares Eligible for
Future Sale" and "Underwriting."
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's engagements, including Year 2000 projects, involve
projects that are critical to the operations of its clients' businesses and
provide benefits that may be difficult to quantify. Although the Company
attempts to contractually limit its liability for damages arising from errors,
mistakes, omissions or negligent acts in rendering its services, there can be no
assurance that its attempts to limit liability will be successful. The Company's
failure or inability to meet a client's expectations in the execution of its
services could result in a material adverse change to the client's operations
and, therefore, could give rise to claims against the Company or damage the
Company's reputation, adversely affecting its business, operating results and
financial condition.
SIGNIFICANT UNALLOCATED NET PROCEEDS
None of the anticipated net proceeds of this offering has been designated
for specific uses. Therefore, the Board of Directors will have broad discretion
with respect to the use of the net proceeds of this offering. See "Use of
Proceeds."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Included in this Prospectus are various forward-looking statements,
including, among others, the expected growth related to the Year 2000 problem,
the Company's goals and strategies, the importance and expected growth of the IT
applications solutions market, the pace of change in the IT marketplace, the
demand for IT services, the ability of the Company to capitalize on offshore
investments and infrastructure,
12
<PAGE> 13
the Company's goal to expand service offerings and to pursue acquisitions, and
the ability to leverage Year 2000 engagements into additional contracts.
These statements are forward-looking and reflect the Company's current
expectations. Such statements are subject to a number of risks and
uncertainties, including, but not limited to, changes in the economic and
political environments, changes in technology and changes in the IT marketplace.
In light of the many risks and uncertainties surrounding the Company and the IT
marketplace, a prospective purchaser should keep in mind that there can be no
assurance that the forward-looking statements described in this Prospectus will
transpire.
THE COMPANY
Complete Business Solutions, Inc. was incorporated under the laws of the
State of Michigan in 1985. The Company maintains its principal executive offices
at 32605 West Twelve Mile Road, Suite 250, Farmington Hills, Michigan 48334. The
Company's web site is www.cbsinc.com. The Company's web site is not part of this
Prospectus. The Company's telephone number is (248) 488-2088.
On March 4, 1997, the Company became the sole shareholder of its
subsidiary, CBS Mauritius, which owns all of the issued and outstanding shares
of Complete Business Solutions (India) Private Limited ("CBS India"), a
corporation organized under the laws of India, and Complete Business Solutions
(Singapore) Private Limited ("CBS Singapore"), a corporation organized under the
laws of Singapore. CBS India and CBS Singapore provide offshore development
services and recruiting and training services for CBSI.
13
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are approximately $37.8 million, based on the price to
the public of $28 1/4 per share and after deducting estimated underwriting
discounts and commissions and offering expenses. The Company expects to use the
net proceeds from this offering for expansion of existing operations, including
the Company's offshore software development operations; development of new
service lines and possible acquisitions of related businesses; and general
corporate purposes, including working capital. Although the Company actively
seeks to acquire related businesses, it currently has no understandings,
commitments or agreements with respect to any acquisitions. Pending their
application as described above, such proceeds will be invested in short-term,
investment grade, interest-bearing securities. The principal purposes of this
offering are to increase the Company's equity capital and financial flexibility,
to provide working capital to fund the Company's growth strategy and to provide
liquidity for the Company's shareholders.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol CBSL since March 5, 1997. The following table sets forth, for
the periods indicated, the range of high and low closing sale prices for the
Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
1997 HIGH LOW
<S> <C> <C>
First Quarter (from March 5, 1997)........................ $12 1/4 $8 3/4
Second Quarter............................................ $25 3/4 $8 7/8
Third Quarter (through August 19, 1997)................... $32 3/8 $ 24
</TABLE>
On August 19, 1997, the closing price of the Company's Common Stock was
$28 3/4 per share. At July 30, 1997, the Company had approximately 37
shareholders of record.
14
<PAGE> 15
DIVIDEND POLICY
The Company intends to retain all of its future earnings to fund growth and
the operation of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. Future cash dividends, if any, will be at
the discretion of the Company's Board of Directors and will depend upon, among
other things, the Company's future operations and earnings, capital requirements
and surplus, general financial condition, contractual restrictions and such
other factors as the Board of Directors may deem relevant. The Company
distributed approximately $8.8 million of the proceeds from the initial public
offering to certain shareholders as part of the S corporation termination.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to give effect to the sale of 1,450,000 shares of
Common Stock by the Company at the public offering price of $28 1/4 per share.
The following table should be read in conjunction with the Consolidated and
Unaudited Condensed Consolidated Financial Statements and related Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred stock, no par value; 1,000,000 shares
authorized; no shares issued........................... $ -- $ --
Common stock, no par value; 30,000,000 shares authorized;
9,300,000 shares issued and outstanding; 10,785,000
shares issued and outstanding, as adjusted(1).......... -- --
Additional paid-in capital................................ 35,803 73,560
Retained earnings......................................... 2,117 2,117
Stock subscriptions receivable............................ (2,125) (2,125)
Cumulative translation adjustment......................... (274) (274)
------- -------
Total shareholders' equity............................. 35,521 73,278
------- -------
Total capitalization.............................. $35,521 $73,278
======= =======
</TABLE>
- -------------------------
(1) Excludes: (i) options outstanding on June 30, 1997 to purchase 644,368
shares of Common Stock at a weighted average exercise price of $8.74 per
share; and (ii) 474,266 additional shares of Common Stock reserved for
issuance upon exercise of options that may be granted in the future under
the Company's 1996 Stock Option Plan. See "Management -- Employee Benefit
Plans."
15
<PAGE> 16
SELECTED FINANCIAL DATA
The selected historical financial data presented below for the five years
ended December 31, 1996, are derived from the Company's Consolidated Financial
Statements and related Notes thereto which have been audited by Arthur Andersen
LLP, independent public accountants. The amounts provided as pro forma statement
of income data have been adjusted to reflect certain transactions as noted.
The selected financial data as of and for each of the interim periods ended
June 30, 1996 and 1997, are derived from Unaudited Condensed Consolidated
Financial Statements of the Company, which in the opinion of management, include
all adjustments that are necessary for a fair presentation of the results for
the interim periods, and all such adjustments that are of a normal recurring
nature. The results of operations for the interim period ended June 30, 1997 are
not necessarily indicative of the results to be expected for any other interim
period or for the full year. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated and Unaudited Condensed
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF INCOME DATA:
Revenues....................................... $32,382 $43,795 $56,358 $67,399 $83,241 $39,548 $50,937
Cost of revenues............................... 25,223 33,505 42,836 53,609 63,302 29,802 37,397
------- ------- ------- ------- ------- ------- -------
Gross profit................................... 7,159 10,290 13,522 13,790 19,939 9,746 13,540
Selling, general and administrative expenses... 5,749 8,353 10,887 11,824 15,455 7,231 9,385
------- ------- ------- ------- ------- ------- -------
Income from operations......................... 1,410 1,937 2,635 1,966 4,484 2,515 4,155
Interest expense (income)...................... 185 197 345 692 539 300 (378)
------- ------- ------- ------- ------- ------- -------
Income before provision for income taxes and
minority interest............................ 1,225 1,740 2,290 1,274 3,945 2,215 4,533
Provision for income taxes..................... -- -- -- -- 84 36 1,991
Minority interest.............................. 36 127 176 252 158 113 82
------- ------- ------- ------- ------- ------- -------
Net income..................................... $ 1,189 $ 1,613 $ 2,114 $ 1,022 $ 3,703 $ 2,066 $ 2,460
======= ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF INCOME DATA:
Revenues................................................................................... $83,241 $39,548 $50,937
Gross profit............................................................................... 19,939 9,746 13,540
Income from operations(1).................................................................. 4,337 2,442 4,131
Interest income(2)......................................................................... (71) (11) (431)
Provision for income taxes(3).............................................................. 1,582 881 1,440
Net income(4).............................................................................. $ 2,826 $ 1,572 $ 3,122
Net income per common share................................................................ $ 0.34 $ 0.19 $ 0.36
Weighted average shares outstanding(5)..................................................... 8,213 8,130 8,712
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 66 $ 425 $ 319 $ 830 $ 3,382 $ 641 $17,763
Working capital............................... 1,961 2,420 3,745 5,799 10,077 7,331 27,512
Total assets.................................. 11,021 16,031 20,740 23,423 31,258 27,429 48,778
Revolving credit facility and long-term
debt........................................ 2,754 4,189 5,933 6,316 6,191 7,557 --
Minority interest............................. 48 175 350 552 1,503 656 --
Total shareholders' equity.................... 4,598 6,211 8,325 9,188 13,951 11,227 35,521
</TABLE>
- -------------------------
(1) Reflects the amortization of goodwill over a period of 20 years as a result
of the Company's purchase of the 28% minority interest in CBS Mauritius. See
Notes 1 and 16 of Notes to Consolidated Financial Statements.
(2) Reflects the elimination of interest expense to give effect to the repayment
of the Company's revolving credit facility and long-term debt. See Note 16
of Notes to Consolidated Financial Statements.
(3) Reflects provision for federal and state income taxes at the effective
income tax rate as if the Company had been taxed as a C corporation and no
foreign tax holidays had been granted during the periods presented. The
provision for income taxes was computed as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
<S> <C> <C> <C>
Statutory federal income tax rate........................... 34.0% 34.0% 34.0%
State income taxes, net of federal tax effect............... 2.7 2.7 1.6
Tax rate differences on foreign earnings not subject to U.S.
tax........................................................ (3.0) (3.0) (4.0)
Amortization of goodwill.................................... 1.4 1.4 0.5
Other....................................................... 0.8 0.8 (0.5)
----- ----- -----
35.9% 35.9% 31.6%
===== ===== =====
</TABLE>
(4) Reflects the elimination of minority interest due to the issuance of 552,632
shares of Common Stock in exchange for the minority interest in CBS
Mauritius. See Notes 1 and 16 of Notes to Consolidated Financial Statements.
(5) Reflects pro forma weighted average shares of Common Stock, plus the portion
of Common Stock sold in the Company's initial public offering needed to
generate proceeds sufficient to repay the Company's revolving credit
facility and long-term debt at the end of each period.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this section, the
words "anticipate," "believe," "estimate," "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in "Risk Factors."
OVERVIEW
Complete Business Solutions, Inc. is a worldwide provider of IT services to
large and mid-size organizations. The Company has been profitable every year
since its inception in 1985, and has experienced a compound annual revenue
growth rate of 29% over the past five fiscal years. The Company leverages its
existing client base by providing quality services and by being responsive to
clients. For each of the fiscal years 1994, 1995, and 1996, and for the
six-month period ended June 30, 1997, existing clients from the previous fiscal
year generated at least 80% of the Company's revenues.
The Company's revenues are generated primarily from professional services
fees. The Company's service offerings include: (i) Year 2000 conversion and
testing services; (ii) large systems applications development and maintenance;
(iii) reengineering legacy applications to client/server technology; (iv)
client/server applications development; (v) IT consulting services; (vi)
packaged software implementation; and (vii) contract programming services.
Contract programming services are typically provided as a member of a project
team working under the direct supervision of the client, are typically billed on
a time-and-materials basis, and have lower gross profit margins than other
professional service offerings. For all other professional service offerings,
the Company generally assumes responsibility for project management and may bill
the client on either a time-and-materials or fixed-price basis, although such
projects are generally billed on a time-and-materials basis. The Company has
been shifting its business away from contract programming services toward higher
margin service offerings. For the six-month period ended June 30, 1996, contract
programming services represented approximately 38% of professional service fee
revenues. For the six-month period ended June 30, 1997, contract programming
services represented approximately 23% of professional services fee revenues.
Gross profit margin for contract programming services and all other service
offerings was approximately 22% and 29%, respectively, for the six-month period
ended June 30, 1997.
The Company recognizes revenues on a time-and-materials basis as the
services are performed. On fixed-price engagements, the Company recognizes
revenues under the percentage of completion method. For the six-month period
ended June 30, 1997, revenues from fixed-price engagements represented
approximately 9.6% of professional service fee revenues.
CBSI's most significant cost is project personnel cost, which consists
primarily of salaries, wages and benefits for its IT professionals. The Company
strives to maintain its gross profit margin by controlling project costs and
offsetting increases in salaries and benefits with increases in billing rates.
The Company has also established a human resource allocation team to ensure that
IT professionals are quickly placed on assignments to minimize nonbillable time
and are placed on assignments that utilize their technical skills and allow for
maximum billing rates. In addition, the Company has realized higher gross profit
margins from the Company's shift to offshore projects in India, where the
salaries of IT professionals are lower as a percentage of professional service
fees. This benefit is partially offset due to additional coordination efforts
and costs for offshore projects. For example, for the six-month period ended
June 30, 1997, CBSI's operating income as a percentage of revenues overall was
approximately 8%, whereas operating income as a percentage of revenues for work
performed offshore in India was approximately 22%.
In 1994, the Company began to provide services as a subcontractor on a
fixed-price project (the "Fixed-Price Project") to design and develop a human
services and child support enforcement system for a state government. The
Company incurred $3.0 million in excess personnel costs, primarily in 1995, to
meet the
17
<PAGE> 18
demands of this project and overall gross profit margin therefore declined from
24% in 1994 to 21% in 1995. Excluding the excess costs associated with this
project, gross profit margins would have remained constant from 1994 to 1995. In
addition, although the Company's revenues increased 20% from 1994 to 1995, the
Company's income from operations decreased approximately 25% for the same period
as a result of the Fixed-Price Project.
In an effort to sustain its growth and profitability, the Company has made
and continues to make substantial investments in infrastructure, including: (i)
software development centers in three locations in the U.S. and two locations in
India; (ii) Year 2000 conversion factories in the U.S. and India; (iii) global
recruiting and training centers; (iv) a local technical charter school; and (v)
an expanded training program for recent U.S. college graduates. The Company
believes that the results of these strategic investments have not yet been fully
realized.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of income data as a percentage of revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED
ENDED DECEMBER 31, JUNE 30,
------------------------ --------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Revenues.................................................. 100% 100% 100% 100% 100%
Cost of revenues.......................................... 76 79 76 75 73
--- --- --- --- ---
Gross profit.............................................. 24 21 24 25 27
Selling, general and administrative expenses.............. 19 18 19 19 19
--- --- --- --- ---
Income from operations.................................... 5% 3% 5% 6% 8%
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1996
Revenues. The Company's revenues increased approximately 29% to $50.9
million for the six-month period ended June 30, 1997 from $39.5 million for the
same period in 1996. This growth in revenues is primarily attributable to
increases in the Company's IT professional workforce, increases in average
billing rates, further expansion of the Company's international operations and
additional services provided to existing clients. The Company's IT professional
workforce increased approximately 13% for the six-month period ended June 30,
1997 from the comparable six-month period in 1996. Revenues from international
operations, principally offshore development centers, increased approximately
81% to $4.9 million for the six-month period ended June 30, 1997 from $2.7
million for the same period in 1996. Revenues from existing clients increased
approximately $5.2 million for the six-month period ended June 30, 1997 from the
same period in 1996.
Gross Profit. Gross profit consists of revenues less cost of revenues. Cost
of revenues consists primarily of salaries (including nonbillable and training
time), benefits, travel and relocation for IT professionals. In addition, cost
of revenues includes depreciation and amortization, direct facility costs and
contractual services. Gross profit increased approximately 39% to $13.5 million
for the six-month period ended June 30, 1997 from $9.7 million for the same
period in 1996. This increase in gross profit is primarily attributable to
increases in the Company's IT professional workforce and average U.S. billing
rates, as well as the continued expansion of the Company's offshore development
centers. Gross profit as a percentage of revenues increased to approximately 27%
for the six-month period ended June 30, 1997 from 25% for the same period in
1996. This increase in gross profit as a percentage of revenues is primarily
attributable to the Company's continued strategic shift of its business toward
higher margin service offerings, including Year 2000 services, and the
increasing utilization and expansion of the Company's offshore development
centers which operate at higher gross profit and operating margins. For the
six-month period ended June 30, 1997, approximately 23% of the Company's
revenues were generated from contract programming services, as compared with
approximately 38% for the same period in 1996.
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<PAGE> 19
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of costs associated with the Company's
direct selling and marketing efforts, human resources and recruiting
departments, administration, training and indirect facility costs. Selling,
general and administrative expenses increased approximately 30% to $9.4 million
for the six-month period ended June 30, 1997 from $7.2 million for the same
period in 1996. This increase resulted from the continued expansion of the
Company's direct selling and marketing effort, further enhancement of
infrastructure, and other general overhead cost increases necessary to support
the Company's continued revenue growth. Selling, general and administrative
expenses represented approximately 19% of revenues for the six-month periods
ended June 30, 1997 and 1996.
1996 COMPARED TO 1995
Revenues. The Company's revenues increased 23% to $83.2 million in fiscal
year 1996 from $67.4 million in fiscal year 1995. This growth in revenues is
primarily attributable to additional services provided to existing clients and
the expansion of the Company's client base to 222 as of December 31, 1996 from
209 as of December 31, 1995. Revenues from existing clients in 1996 increased
$7.5 million over revenues from those clients during 1995. Revenues from the
Company's international operations increased 24% to $5.7 million in 1996 from
$4.6 million in 1995.
Gross Profit. Gross profit increased approximately 44% to $19.9 million in
fiscal year 1996 from $13.8 million in fiscal year 1995. This increase in gross
profit is attributable primarily to the expansion of the Company's client base
and the impact of the Fixed-Price Project on fiscal year 1995 results. Gross
profit as a percentage of revenues increased to 24% in 1996 from 21% in 1995.
This increase is due primarily to billing rate increases partially offset by
salary increases to IT professionals in 1996 and the impact of the Fixed-Price
Project on fiscal year 1995 results.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 31% to $15.5 million in 1996 from $11.8
million in 1995. This increase resulted from expenses incurred to build and
enhance the infrastructure necessary to support the Company's continued revenue
growth. As a percentage of revenues, selling, general and administrative
expenses increased to 19% in fiscal year 1996 from 18% in fiscal year 1995.
1995 COMPARED TO 1994
Revenues. The Company's revenues increased 20% to $67.4 million in fiscal
year 1995 from $56.4 million in fiscal year 1994. This growth in revenues is
primarily attributable to additional services provided to existing clients, the
expansion of the Company's client base to 209 as of December 31, 1995 from 187
as of December 31, 1994, and the expansion of the Company's international
operations. Revenues from existing clients in 1995 increased $5.6 million over
revenues from those clients during 1994. Revenues from the Company's
international operations increased 77% to $4.6 million in fiscal year 1995 from
$2.6 million in fiscal year 1994.
Gross Profit. Gross profit increased 2% to $13.8 million in fiscal year
1995 from $13.5 million in fiscal year 1994, despite the impact of the
Fixed-Price Project on fiscal year 1995 results. Gross profit represented 21% of
total revenues in fiscal year 1995 as compared to 24% in fiscal year 1994.
Excluding the excess costs associated with the Fixed-Price Project, gross profit
margins would have remained constant from fiscal year 1994 to fiscal year 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8% to $11.8 million in fiscal year 1995 from
$10.9 million in fiscal year 1994. This increase was primarily attributable to
infrastructure investments in CBSI's offshore facilities and general overhead
cost increases. As a percentage of revenues, these expenses decreased to 18% in
fiscal year 1995 from 19% in fiscal year 1994.
19
<PAGE> 20
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters ending with the quarter ended June
30, 1997. This information has been prepared on the same basis as the audited
consolidated financial statements contained elsewhere in this Prospectus and
includes, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
information for the periods presented. This information should be read in
conjunction with the Company's Consolidated and Unaudited Condensed Consolidated
Financial Statements and related Notes thereto. Results of operations for any
previous fiscal quarter are not indicative of results for the full year or any
future quarter. See "Risk Factors -- Variability of Quarterly Operating
Results."
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $16,487 $16,903 $19,128 $20,420 $21,951 $21,742 $24,275 $26,662
Cost of revenues................ 13,245 13,736 14,284 15,518 16,737 16,763 17,918 19,479
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 3,242 3,167 4,844 4,902 5,214 4,979 6,357 7,183
Selling, general and
administrative expenses....... 2,928 2,746 3,613 3,618 3,855 4,369 4,576 4,809
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.......... 314 421 1,231 1,284 1,359 610 1,781 2,374
Interest expense (income)....... 205 155 141 159 146 93 (65) (313)
Provision for income taxes...... -- -- 17 19 24 24 1,135 856
Minority interest............... (6) 132 35 78 67 (22) 82 --
------- ------- ------- ------- ------- ------- ------- -------
Net income...................... $ 115 $ 134 $ 1,038 $ 1,028 $ 1,122 $ 515 $ 629 $ 1,831
======= ======= ======= ======= ======= ======= ======= =======
Pro forma incremental income tax
provision (benefit)........... 15 18 358 353 383 166 (560)(1) --
------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income............ $ 100 $ 116 $ 680 $ 675 $ 739 $ 349 $ 1,189 $ 1,831
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- -------------------------
(1) Represents elimination of impact for termination of S corporation status.
LIQUIDITY AND CAPITAL RESOURCES
From the Company's inception in 1985 through March 5, 1997, the Company
generally funded its operations and working capital needs through internally
generated funds, periodically supplemented by borrowings under the Company's
revolving credit facility with a commercial bank. The Company's cash provided by
operations was $0.6 million, $1.3 million, $4.5 million and $6.5 million for the
fiscal years ended December 31, 1994, 1995, and 1996, and for the six-month
period ended June 30, 1997, respectively.
The principal use of cash for investing activities during the three years
ended December 31, 1996 and the six-month period ended June 30, 1997 was for the
purchase of property and equipment and computer software primarily as part of
the development and enhancement of the Company's offshore software development
centers.
Historically, borrowings and repayments under the Company's revolving
credit facility represented the most significant components of cash provided or
used by financing activities. However, net cash provided by financing activities
increased to approximately $8.8 million during the six-month period ended June
30, 1997 primarily due to the Company realizing net proceeds of approximately
$23.8 million from its initial public offering in March 1997. All outstanding
borrowings under the revolving credit facility as of March 5, 1997 were repaid
from the proceeds of the initial public offering. In connection with the
termination of the Company's S corporation status, the Company made partial
distributions of its previously undistributed S corporation earnings totalling
approximately $8.8 million during the six-month period ended June 30, 1997.
Under an arrangement with a commercial bank, the Company may borrow an
amount not to exceed $21 million with interest at the bank's prime interest rate
or the Libor rate. The borrowings under this facility are short-term, payable on
demand and are secured by trade accounts receivable and equipment of the
Company.
20
<PAGE> 21
As of June 30, 1997, there were no borrowings outstanding under this facility.
In recent years, the Company has executed several short-term notes with the bank
to finance the purchase of equipment and software. During the six-month period
ended June 30, 1997, the balances outstanding on these notes were repaid.
During 1996, CBS Mauritius repurchased its stock held by an affiliated
entity for approximately $2.7 million. Concurrently therewith, CBS Mauritius
sold a 28% ownership interest to JF Electra for approximately $4.0 million, with
proceeds of approximately $3.5 million, net of transaction costs.
In 1996, Mr. Vattikuti made a capital contribution to CBSI of approximately
$1.1 million and loaned the Company approximately $0.6 million. This loan,
including interest of approximately $23,000 at 8.25% per annum, was repaid on
December 30, 1996.
The international operations of the Company, principally the offshore
development centers, accounted for approximately 4.7%, 6.8%, 6.9% and 9.6% of
the Company's total revenues in fiscal years 1994, 1995, and 1996, and for the
six-month period ended June 30, 1997, respectively. Most of the Company's
international revenues are billed in U.S. dollars. The Company recognizes
transaction gains and losses in the period of occurrence. Foreign currency
fluctuations in fiscal years 1994, 1995, and 1996, and for the six-month period
ended June 30, 1997, did not have a material impact on income from operations as
currency fluctuations on revenue denominated in a foreign currency were offset
by currency fluctuations on expenses denominated in a foreign currency. There
were no material operating trends or effects on liquidity as a result of
fluctuations in the functional currency due to the insignificance of the
revenues and expenses denominated in foreign currencies. In addition, all
significant monetary assets and liabilities are denominated in U.S. dollars, and
therefore, the Company does not generally use any types of derivatives to hedge
against foreign currency fluctuations, nor does it speculate in foreign
currency.
Inflation did not have a material impact on the Company's revenues or
income from operations in fiscal years 1994, 1995, and 1996, and for the
six-month period ended June 30, 1997.
The Company currently anticipates that the proceeds from this offering,
together with existing sources of liquidity and cash generated from operations
and the initial public offering, will be sufficient to satisfy its cash needs at
least through the next twelve months.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
was issued in February 1997. The Company will be required to adopt the new
standard for the year and quarter ended December 31, 1997. Early adoption of
this standard is not permitted. The primary requirements of this standard are:
(i) replacement of primary earnings per share with basic earnings per share,
which eliminates the dilutive effect of options and warrants; (ii) use of an
average share price in applying the treasury method to compute dilution for
options and warrants for diluted earnings per share; and (iii) disclosure
reconciling the numerator and denominator of earnings per share calculations.
The Company plans to adopt this statement in fiscal year 1997. See Note 5 of
Notes to Unaudited Condensed Consolidated Financial Statements.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," was issued in February 1997. The Company
will be required to adopt the new standard for the year ended December 31, 1998.
This statement requires specific disclosure regarding the Company's capital
structure, including descriptions of the securities comprising the capital
structure and the contractual rights of the holders of such securities. The
Company plans to adopt this statement in fiscal year 1998.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued in June 1997. The Company will be required to
adopt the new standard for the year ended December 31, 1998, although early
adoption is permitted. The primary objective of this statement is to report and
disclose a measure ("comprehensive income") of all changes in equity of a
Company that result from transactions and other economic events of the period
other than transactions with owners. The Company will adopt this statement in
fiscal year 1998 and does not anticipate that the statement will have a
significant impact on its financial statements.
21
<PAGE> 22
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in June 1997. The
Company will be required to adopt the new standard for the year ended December
31, 1998, although early adoption is permitted. This statement requires use of
the "management approach" model for segment reporting. The management approach
model is based on the way the Company's management organizes segments within the
Company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a
company. The Company will adopt this statement in fiscal year 1998.
22
<PAGE> 23
BUSINESS
SUMMARY
CBSI is a worldwide provider of IT services to large and mid-size
organizations. The Company offers its clients a broad range of IT services, from
advising clients on strategic technology plans to developing and implementing
appropriate IT applications solutions. CBSI offers custom-tailored solutions
based on an assessment of each client's needs. The Company's services include:
(i) Year 2000 conversion and testing services; (ii) large systems applications
development and maintenance; (iii) reengineering legacy applications to
client/server technology; (iv) client/server applications development; (v) IT
consulting services; (vi) packaged software implementation; and (vii) contract
programming services.
CBSI provides services in a wide variety of computing environments and uses
leading technologies, including Year 2000 tools, client/server architectures,
object-oriented programming languages and tools, distributed database management
systems, and the latest network and communications technologies. The Company
believes that the breadth of its service offerings fosters long-term client
relationships, affords cross-selling opportunities, minimizes dependence on any
single technology or client and enables the Company to serve as a single source
provider for its clients' IT applications solutions. This single or preferred
provider approach is consistent with CBSI's full life-cycle, client-oriented
approach to IT solutions.
CBSI provides IT services to clients in a diverse range of industries. Its
clients include American President Lines, Chrysler Corporation, Citibank, Ford
Motor Company, IBM, IBM Global Solutions/Foremost Insurance, Lands' End, the
State of Indiana, the State of Nevada, S.W.I.F.T., Spartan Stores and UNUM Ltd.
During 1996, the Company provided services to over 220 clients in the U.S.,
Europe and Asia. The Company's strategy is to maximize its client retention rate
and secure additional engagements by providing both quality services and client
responsiveness. For each of the fiscal years 1994, 1995, and 1996, and for the
six-month period ended June 30, 1997, existing clients from the previous fiscal
year generated at least 80% of the Company's revenues. These recurring revenues
have contributed significantly to the Company's 29% compound annual revenue
growth rate over the past five fiscal years.
Since 1992, CBSI has developed an extensive offshore infrastructure in
India, including two modern software development centers in Bangalore and Madras
and a training center in Hyderabad. The Company believes this established
offshore infrastructure is one of the largest in the industry and differentiates
it from those competitors who have no offshore capability, have recently
established offshore capability or rely mostly on contract service providers to
offer such services. With its offsite and offshore development options, the
Company can quickly provide clients with IT applications solutions on a
cost-effective basis.
The Company's goal is to become the preferred provider of IT services to an
expanding base of clients. The Company's strategy to achieve this goal is to:
(i) cross-sell services to existing clients; (ii) increase and build upon Year
2000 engagements; (iii) capitalize on significant investments in infrastructure
and increase its international capabilities; (iv) develop new and expand
recently added service offerings such as Enterprise Resource Planning ("ERP")
software package installation and Internet/intranet applications; and (v) pursue
targeted acquisitions.
THE IT SERVICES INDUSTRY
Heightened competition, deregulation, globalization and rapid technological
advances are forcing organizations to make fundamental changes in their business
processes. These pressures have compelled organizations to improve the quality
of products and services, shorten time to market, reduce costs and strengthen
client relationships. Increasingly, organizations are addressing these issues by
utilizing IT solutions that facilitate the rapid and flexible collection,
analysis and dissemination of information. Accordingly, an organization's
ability to integrate and deploy new information technologies in a cost-effective
manner has become critical to competing successfully in today's rapidly changing
business environment.
During this time of increasing reliance on IT, rapid technological change
is challenging the capabilities of MIS departments within these organizations.
The pace of this change quickly renders existing IT infrastructure obsolete and
makes it more difficult for organizations to maintain the requisite internal
expertise needed to
23
<PAGE> 24
evaluate, develop and integrate new technologies. As a result, organizations are
increasingly turning to third-party IT service providers to help them develop
and support complex IT systems and applications.
Due to the foregoing factors, demand for IT services has grown
significantly. According to industry sources, the worldwide market for IT
services was approximately $185 billion in 1995, and is projected to increase to
$292 billion in 2000. The worldwide market for systems integration, consulting
applications development and outsourcing services was approximately $91 billion
in 1994 according to industry sources and is estimated to grow by 16.5% annually
through 1999. The domestic IT services market is projected to grow from
approximately $75 billion in 1995 to approximately $130 billion in 2000.
The Year 2000 problem, which prevents existing applications from properly
interpreting dates after 1999, represents a significant opportunity for IT
services providers. The prevalence and interdependence of date-dependent
applications in complex control systems is expected to cause the Year 2000
problem to have a widespread impact on technology-dependent organizations.
Industry sources estimate that a typical Fortune 100 company will spend between
$50 million and $100 million for Year 2000 services. Smaller companies will also
spend significant amounts to solve this problem. Solutions to the Year 2000
problem include: (i) renovation of existing applications with Year 2000
compliant code; (ii) replacement of existing software with Year 2000 compliant
software packages; and (iii) reengineering of legacy applications to Year 2000
compliant client/server technologies.
While the general industry trend is toward client/server architectures,
many organizations choose to maintain certain legacy mainframe systems because
such systems provide a superior solution to their specific needs or because of
the costs required to replace such systems. As university programs cease
teaching mainframe related skills and programmers cross-train away from these
areas, MIS managers are experiencing increasing difficulty finding affordable,
qualified personnel to support the vast number of legacy systems. For these
reasons, the maintenance and reengineering of legacy systems continues to
represent a substantial opportunity for IT services providers.
THE CBSI SOLUTION
The CBSI solution enables its clients to use IT as a more effective
business tool consistent with their evolving business needs. The following are
key attributes of the CBSI solution:
Provide a Broad Range of IT Services. The Company offers its clients a
broad range of IT services from development, reengineering and maintenance of
legacy applications systems to client/server applications development,
Internet/intranet and other emerging technologies. The Company therefore can
serve as the single source for a client's IT applications solutions. The Company
provides its services in a wide variety of computing environments and uses
technologies that include mainframe and client/server architectures,
object-oriented programming languages and tools, distributed database management
systems, Year 2000 tools and network and communications technologies.
Solve Year 2000 Problem. The Company has developed a formal project
management methodology, known as The Time Machine 2000, that addresses all
aspects of the Year 2000 problem in mainframe, client/server and LAN
environments. This methodology helps assure a quality conversion process and
addresses application portfolio analysis, impact assessment, strategic planning,
conversion, testing and implementation. This methodology is one of a limited
number that has been certified by the Information Technology Association of
America ("ITAA") as being compliant with the industry standard promulgated by
ITAA. The Company has developed Year 2000 conversion factories to provide
cost-effective and timely conversion solutions for its clients. The conversion
factories, located at both CBSI's U.S. and Indian headquarters, employ
professionals who have been specifically trained to meet the particular demands
of Year 2000 engagements. The Company also provides Year 2000 enterprise-level
consulting and testing services. CBSI has already successfully completed all
phases of Year 2000 projects for a division of Chrysler Corporation and for IBM
Global Solutions/Foremost Insurance and is currently working on 25 additional
Year 2000 projects.
24
<PAGE> 25
Offer Flexible Project Delivery. The Company offers its clients a choice
among any combination of the following three options for delivery of project
work: (i) onsite at the client facility; (ii) offsite at a CBSI development
facility in Michigan, California or Illinois; and (iii) offshore at CBSI
development facilities in India. These options enable the Company's clients to
determine their degree of project oversight and to control the costs and speed
of project delivery. Execution of all or part of IT projects offshore can result
in significant time and cost savings when compared to domestic delivery of such
services. CBSI has developed a formal project management methodology, CBSI
Offsite Success Management Methodology ("COSMO"), which is specifically designed
to meet the needs of offsite and offshore projects.
To meet the growing worldwide demand for offshore IT services, the Company
has invested in an extensive offshore infrastructure in India, including two ISO
9001 compliant software development centers in Madras and Bangalore. In contrast
to competitors who have no offshore capability, have only recently established
offshore capability or rely mostly on contract service providers to offer such
services, the Company has established an offshore infrastructure which it
believes is one of the largest in the industry. The Company employs over 500
professionals in these centers which have the capacity to accommodate
approximately 800 professionals. With its offsite and offshore development
options, the Company can quickly provide solutions tailored to the IT needs of
its clients.
Recruit and Train Globally. The Company has established a domestic and
international network to recruit employees of all experience levels, from recent
college graduates to seasoned IT professionals. The Company provides new
recruits with up to two months of training in software engineering techniques
and key technologies. The Company has made significant investments in two
training centers, located in Michigan and India. These centers employ full-time
instructors and are equipped with client/server and mainframe hardware, software
and development tools. These training resources provide the Company with
qualified IT professionals to service its clients' needs.
CBSI GROWTH STRATEGIES
The Company's goal is to become the preferred provider of IT services to an
expanding base of clients. The Company's strategy to achieve this goal includes
the following elements:
Cross-Sell Services to Existing Clients. The Company believes it will grow
by continuing to establish and maintain long-term client relationships. The
access and goodwill offered by these relationships provide the Company with
significant advantages over its competitors in marketing additional services and
solutions to such clients. The Company also believes its long-term client
relationships and ability to address all of its clients' IT applications needs
distinguish the Company from many of its competitors. During 1996, the Company
provided services to over 220 clients in the U.S., Europe and Asia. The
Company's strategy is to maximize its client retention rate and secure
additional engagements by providing quality services and client responsiveness.
For each of the fiscal years 1994, 1995, and 1996, and for the six-month period
ended June 30, 1997, existing clients from the previous fiscal year generated at
least 80% of the Company's revenues.
Increase and Build Upon Year 2000 Engagements. The Company is actively
marketing its Year 2000 conversion capabilities and Year 2000 testing services
to existing and new clients. CBSI anticipates that Year 2000 conversion services
will represent an increasing percentage of its revenues for the next few years.
The Company performs a detailed analysis of clients' existing IT systems and
applications in connection with these services. The Company intends to expand
its Year 2000 enterprise-level consulting and testing services in mainframe,
client/server and LAN environments. The Company's strategy is to leverage its
knowledge of clients' IT applications systems obtained during Year 2000 projects
into additional engagements involving other services, including maintaining
existing applications systems and reengineering to client/server technology,
implementing ERP software packages and providing Internet/intranet applications
solutions.
Capitalize and Expand on Significant Investments in Infrastructure and
Capabilities and Increase International Capabilities. The Company has made and
will continue to make additional significant investments in its offsite and
offshore infrastructures as well as its systems, methodologies, training
programs and marketing efforts. These investments include two client/server
labs, three U.S. software development centers, two offshore software development
centers, two training centers and dedicated, high-speed satellite
25
<PAGE> 26
communication links. The Company believes that its existing offshore investments
can support a larger organization and in addition, intends to significantly
expand its U.S. and offshore facilities.
Expand Service Offerings. The Company evaluates emerging technologies as a
source of additional service offerings for its existing and prospective clients.
For example, the Company recently added new service offerings, including
Internet/intranet applications and implementation of ERP software packages such
as ORACLE, PEOPLESOFT and SAP. The Company anticipates that its broad and
expanding range of services will minimize its dependence on any single
technology.
Pursue Targeted Acquisitions. Using either cash or its Common Stock, or a
combination thereof, the Company seeks acquisitions that complement its core
skills and that have the potential to increase the overall value of the Company,
rather than merely increase its revenues. Examples of such companies would
include those with specific industry or technical skills that fit well with the
Company's existing and targeted client base.
26
<PAGE> 27
CBSI SERVICES
The Company offers its clients a broad range of IT services, from advising
clients on strategic technology plans to developing and implementing appropriate
IT solutions. The Company provides services in the following categories:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CBSI SERVICES DESCRIPTION
- ----------------------------------------------------
<S> <C> <C> <C>
Year 2000 Conversion and Testing Services - Conduct impact assessments and assist clients
with strategic planning for Year 2000 compliance
- Renovate existing applications to make them Year
2000 compliant
- Replace existing software with Year 2000
compliant software packages
- Reengineer legacy applications to Year 2000
compliant client/server technology
- Enterprise-level consulting and testing services
- -----------------------------------------------------------------------------------------------------------------
Large Systems Applications Development, - Design large-scale, complex solutions capable of
Reengineering and Maintenance managing transaction-intensive applications
- Develop and maintain applications using COBOL,
CICS, DB2 and other mainframe programming
environments
- -----------------------------------------------------------------------------------------------------------------
Reengineering Legacy Applications to - Reengineer from centralized, mainframe-based
Client/Server Technology systems to open, distributed architecture
- Preserve core application logic
- Reengineer existing legacy systems into
mainframe-based super server in multi-tiered,
distributed architecture
- -----------------------------------------------------------------------------------------------------------------
Client/Server Applications Development - Conceptualize and design systems based on
distributed object-oriented technologies and
methodologies such as BOOCH and RAMBAUGH
- Develop applications using SYBASE, SQL Server,
ORACLE, INFORMIX, and Access databases; Visual
Basic, Powerbuilder, C++ as graphical user
interfaces; and UNIX, OS/2 and Windows NT
operating systems
- -----------------------------------------------------------------------------------------------------------------
Packaged Software Implementation - Implement packaged software solutions
(PEOPLESOFT, ORACLE, SAP, WALKER)
- Customize software packages to client
specifications
- Provide user group training
- -----------------------------------------------------------------------------------------------------------------
IT Consulting Services - Provide technical architecture and network
design, information technology planning, data
warehousing and business process reengineering
consulting services
- Conceptualize and design Internet and intranet
solutions using Java/Java Script/Java applets
and HTML
- -----------------------------------------------------------------------------------------------------------------
Contract Programming Services - Develop software applications (client/server and
mainframe)
- Reengineer software applications across
platforms
- Maintain and enhance software applications
(client/server and mainframe)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company uses both industry-proven and proprietary methodologies to
enhance the quality, consistency and efficiency of its projects. All levels of
the Company's IT consultants, from entry-level programmers to project managers,
are given formal instruction in various aspects of these methodologies. A
methodology used by the Company is METHOD/1, which the Company licenses from
Andersen Consulting.
27
<PAGE> 28
CBSI has extended METHOD/1 to incorporate the Company's Time Machine 2000 and
COSMO methodologies. The COSMO methodology is specifically designed to meet the
needs of offsite and offshore projects. This methodology contains the specific
procedures required to coordinate the activities of multiple sites across
different time zones. All three methodologies enable CBSI to provide
applications development in a controlled manner with repeatable and proven
processes. Quality assurance is handled by a common centralized unit. A team of
quality specialists performs project quality reviews and inspections, maintains
the Company's project management methodologies and assists project managers in
estimating costs and executing projects.
SOFTWARE PRODUCTS
The Company's primary software product offering is the Advanced Program for
Educational Computer Solutions ("APECS") software which is licensed by 70
different users. Clients use APECS to manage the business and student records of
educational institutions for K-12 school districts and for higher education. The
Company provides periodic enhancements to the product and maintenance to the
users. APECS systems are installed at major sites throughout the United States.
Among the current users are Allentown High School District, Pennsylvania;
University of Detroit Mercy, Michigan; Martin County Schools, Florida; and
Monroe Community College, Michigan. The Company is currently reengineering this
system to a client/server environment. The Company maintains this product at its
Madras, India and Lombard, Illinois facilities.
SALES AND MARKETING
The majority of new sales are generated by the Company's business units,
each of which focus on clients within a geographic area or industry group. The
manager of each business unit is compensated based on the financial performance
of the unit and other contributions to the Company. The business unit manager is
responsible for managing client relationships, ensuring the delivery team is
performing as expected and identifying new business opportunities. This
structure fosters an entrepreneurial atmosphere within each business unit.
Because of the relationships the business unit managers maintain with their
clients, these managers are positioned to identify opportunities to cross-sell
the Company's services. Such relationships also result in a significant number
of client referrals.
The Company also uses telemarketers to establish initial client contact and
prequalify potential new clients. Qualified prospective clients are referred to
the Company's dedicated sales group, whose backgrounds include both technical
and sales experience. This sales group is responsible for identifying clients'
needs and promoting the Company's services to potential clients. Once potential
clients are further qualified by the sales group, the Company assembles a team
consisting of sales group members, the appropriate business unit manager and a
project delivery manager. This team makes the client sales call and is
ultimately responsible for closing the sale.
In addition to its sales group, the Company has a dedicated marketing
department which works in conjunction with an outside public relations firm. The
marketing department is responsible for coordination of all corporate
communications, including the scheduling of press conferences to promote the
Company's services and delivery methodologies.
CLIENTS
The Company's largest client, IBM, accounted for 19%, 12% and 9% of the
Company's total revenues for fiscal years 1995 and 1996, and for the six-month
period ended June 30, 1997, respectively. The IT services provided to IBM were
divided among several divisions and subsidiaries. No other client accounted for
more than 10% of the Company's revenues for the same periods. During 1996, the
Company provided services to over 220 clients in the U.S., Europe and Asia. The
Company's strategy is to maximize its client retention rate and secure
additional engagements by providing quality services and client responsiveness.
28
<PAGE> 29
Organizations to which the Company provided services during the six-month
period ended June 30, 1997, include:
<TABLE>
<CAPTION>
YEAR OF
FIRST
CLIENT ENGAGEMENT
<S> <C>
Manufacturing:
Chrysler Corporation......... 1985
Ford Motor................... 1989
Johnson Controls............. 1994
Retail Distributions:
Spartan Stores............... 1992
The GAP...................... 1993
Lands' End................... 1996
Public Sector:
State of Michigan............ 1988
State of Indiana............. 1992
State of Nevada.............. 1992
Transportation:
American President Lines..... 1990
</TABLE>
<TABLE>
<CAPTION>
YEAR OF
FIRST
CLIENT ENGAGEMENT
<S> <C>
Financial Services:
S.W.I.F.T.................... 1985
Harris Bank.................. 1993
Bank of America.............. 1995
Citibank..................... 1996
Insurance:
UNUM Ltd..................... 1995
IBM Global Solutions/Foremost
Insurance................. 1996
Technology:
IBM.......................... 1989
Tandem Computers............. 1989
Union Pacific Technology..... 1992
Utilities:
Michigan Consolidated Gas
Co........................ 1992
Southern California Edison... 1994
</TABLE>
REPRESENTATIVE ENGAGEMENTS
Examples of the Company's engagements, which are representative of the
nature of CBSI services and client relationships, are set forth below:
CLIENT/SERVER-BASED APPLICATIONS DEVELOPMENT/END-TO-END YEAR 2000 CONVERSION
PROJECT (OFFSITE/ONSITE)
Problem. A division of a manufacturer required software enhancements
in order to properly process expanded part number codes and dates beyond
the year 1999.
Solution. The Company provided impact assessment, strategic planning,
coding, testing and implementation of the required software enhancements.
Year 2000 modifications were carried out in accordance with the Company's
Time Machine 2000 methodology. The project environment included IMS/DB,
DB2, CICS, IMS/DC and COBOL on an IBM mainframe. The majority of work was
completed offsite at one of the Company's U.S. software development
centers. At its peak, 75 Company IT professionals were assigned to this
project, which was completed in nine months.
LARGE-SCALE APPLICATIONS DEVELOPMENT IN CLIENT/SERVER TECHNOLOGY (OFFSITE)
Problem. A manufacturing company required IT systems which would tie
production volume to international sales forecasts, thereby eliminating
undesired inventory build-up.
Solution. The Company provided a team of project managers,
client/server architects and software developers to design, code, test and
implement a forecasting application tool using C++, Powerbuilder, APOL,
ENTERA and SYBASE. Software design was carried out using object-oriented
methodologies, Erwin for database design and Rational Rose for data
modeling. At its peak, the project team consisted of 30 Company IT
professionals. Two versions of the forecasting application tool have
already been delivered, and the Company is currently deploying the latest
version at 170+ sites on 5 continents around the world. The project, which
is being conducted offsite, has an expected duration of two years.
REENGINEERING LEGACY APPLICATIONS TO CLIENT/SERVER TECHNOLOGY
(ONSITE/OFFSHORE)
Problem. An insurance company wanted to replace existing
mainframe-based applications with client/server-based applications in order
to reduce software maintenance costs.
Solution. The Company has partnered with this client to redesign its
existing systems in a client/server environment under OS/2, SYBASE, and SQL
Server as RDBMS using NS-DK as the
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<PAGE> 30
graphical user interface ("GUI") and C as the development language. This
system fully supports the European Monetary Unit. Using a combination of
onsite and offshore project teams, the Company was responsible for
requirements analysis, as well as for designing, coding, testing and
implementing systems. The system was successfully delivered on time and the
Company has been retained to provide ongoing maintenance.
LARGE SYSTEMS APPLICATIONS MAINTENANCE (ONSITE/OFFSHORE)
Problem. A financial services organization wanted to outsource
maintenance of a software application in order to reduce costs and
re-deploy its internal IT professionals on new projects.
Solution. The Company is executing the project both onsite at the
client's facilities and offshore at CBSI's Bangalore, India facility. The
client uses the Company as the "center of expertise" with respect to the
application. A team of 15 Company IT professionals has been assigned to
this project for two years. The project environment includes VAX/VMS, Open
VMS, DOS, UNIX, Novell NetWare, PROIV, ANSI C and Pascal.
REENGINEERING LEGACY APPLICATIONS TO CLIENT/SERVER TECHNOLOGY
(ONSITE/OFFSHORE)
Problem. A grocery wholesaler wanted to reengineer all of its business
applications, including Year 2000 conversion.
Solution. The Company provided the client with the necessary technical
expertise onsite to redesign, program, test and implement all of its core
software applications. The Company has deployed a project team of 35 IT
professionals, which is growing to 60 IT professionals for the Year 2000
conversion. The Company has executed strategic studies through joint
application development ("JAD") sessions, business process reengineering
and phased design, development and implementation. Some of the client's
systems are being reengineered to a client/server platform under a UNIX
operating system, using INFORMIX as the database and Visual Basic as the
graphical user interface. Mainframe applications to undergo Year 2000
conversion include systems running under DB2, ADABAS, NATURAL and COBOL.
APPLICATIONS MAINTENANCE AND YEAR 2000 CONVERSION SERVICES (ONSITE/OFFSHORE)
Problem. A utility needed a cost effective solution to application
maintenance and Year 2000 conversion requirements for customer service,
accounts receivable, inventory and general ledger applications.
Solution. The Company provided a partnership approach to assume
responsibility to maintain and enhance key existing systems using a
combined team of offshore and onsite maintenance professionals. By
deploying a team of 25 IT professionals onsite, combined with 40 IT
professionals offshore, the utility was able to leverage the business
knowledge of the Company's onsite team together with the cost advantages of
the Company's offshore facility in Madras, India. Using the knowledge
gained by the Company's maintenance team for the affected applications,
together with the tools, techniques and process from the Company's Time
Machine 2000 methodology, the Company began the Year 2000 conversion
effort. The applications being maintained and renovated for the Year 2000
include COBOL/CICS/DB2 and IDMS/ADSO mainframe technology.
HUMAN RESOURCES
The Company's success depends in large part on its ability to attract,
develop, motivate and retain highly skilled IT professionals. The Company's
strategy for achieving "career-based employment" includes career planning,
thorough initial and ongoing training, allocation of assignments in accordance
with employee skills and career objectives and a comprehensive benefits package
including a Company-matched 401(k) plan, health and dental insurance, short-term
disability insurance, a flexible spending account and tuition reimbursement.
Since the initial public offering of Common Stock on March 5, 1997, the Company
has increased the use of employee stock options as part of its recruitment and
retention strategy.
The Company has 26 full-time employees dedicated to recruiting IT
professionals and managing its human resources. The Company's recruiting
activities draw on an international pool of IT talent. The
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<PAGE> 31
Company has full-time personnel dedicated to handling visa application and
compliance issues for international recruits. CBSI actively recruits in the
United States, India, England, Australia, New Zealand, the Philippines, Mexico
and Singapore. Recruiting methods include advertisement in leading newspapers,
trade magazines, the Company's web site and participation in career fairs. The
Company also participates in on-campus recruiting for recent college graduates
and has hired employees from various schools, including the University of
Michigan, Michigan State University, Ohio State University, the University of
Notre Dame, Albion College, Loyola College, Indiana University, the University
of California and the University of Illinois. During the past two years, the
Company has hired 106 recent U.S. college graduates. In addition, the Company's
employees are actively involved in referring individuals and screening
candidates for new positions.
The Company has established two employee training centers located in
Michigan and India. These training centers employ full-time instructors and are
equipped with client/server and mainframe hardware, software and development
tools. New college graduates receive two months of full-time classroom
instruction in mainframe (IMS, DB2, CICS, COBOL) or client/server (UNIX, C, C++,
OS/2 Presentation Manager) skills. This training is followed by one month of
self-study. Employees receive full salary and benefits during this training
period. Between projects and after business hours, all IT professionals receive
ongoing training on a variety of technology platforms. The Company's education
and training department helps employees make the transition from legacy to
client/server skills by providing cross-platform training in new technologies.
In addition to comprehensive technical training, the Company provides extensive
training in quality processes and cross-cultural communication skills. In
addition, the Company recently began offering training courses to non-employees
for a fee. The Company may hire graduates of these training programs.
As part of its retention efforts, the Company has formulated a strategy for
minimizing turnover which emphasizes: (i) human resource management; (ii)
contractual limitations effective upon termination of employment; (iii)
competitive salaries; (iv) comprehensive benefits; (v) employee stock options;
and (vi) deferred compensation.
The Company's IT professionals typically have Bachelor's or Master's
degrees in Computer Science or another technical discipline. As of June 30,
1997, the Company had 1,632 employees comprised of 1,456 IT professionals, 32
sales and marketing personnel and 144 general and administrative personnel. As
of June 30, 1997, the Company also had 62 independent contractors working on
client engagements.
COMPETITION
The IT services industry is highly competitive and served by numerous
national, regional and local firms, all of which are either existing or
potential competitors of the Company. Primary competitors include Cambridge
Technology Partners, Information Management Resources, Inc. and Keane, Inc.,
along with participants from a variety of market segments, including "Big Six"
accounting firms, and implementation firms, applications software firms, service
groups of computer equipment companies, general management consulting firms,
programming companies and temporary staffing firms. The Company believes that
the principal competitive factors in the IT services industry include the range
of services offered, technical expertise, responsiveness to client needs, speed
in delivering IT solutions, quality of service and perceived value. Based on the
Company's experience in competitive situations, the Company believes that it
competes favorably with respect to these factors. See "Risk Factors --
Competition."
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its proprietary rights and the proprietary rights of third parties from
whom the Company licenses intellectual property. The Company enters into
confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights. In addition, the
laws of certain foreign countries in which the Company's products are, or may
be, developed or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the U.S. This lack of
protection may impair the Company's ability to protect its
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intellectual property adequately and could have a material adverse impact on the
Company's business. See "Risk Factors -- International Property Rights."
The Company has developed and owns the proprietary rights for The Time
Machine 2000 and COSMO methodologies; however, the copyrights to such
methodologies have not been registered. In addition, the Company owns service
marks for The Time Machine 2000 and COSMO and has submitted federal trademark
applications for each.
Software developed by the Company in connection with a client engagement is
typically assigned to the client. In limited situations, the Company may retain
ownership, or obtain a license from its client, which permits CBSI or a third
party to market the software for the joint benefit of the client and CBSI or for
the sole benefit of CBSI. The Company has also developed and copyrighted or
acquired software products which are generally licensed to users pursuant to a
license agreement. The Company's software products include APECS, APECS Custom
View and Micro APECS Scheduler. APECS is a registered trademark of the Company.
FACILITIES
The Company leases approximately 50,000 square feet of office space in
Farmington Hills, Michigan which is used by the Company's senior management,
administrative personnel, human resources and sales and marketing functions.
This lease expires on June 15, 2003. The Company also leases facilities in
Lombard, Illinois and Milpitas, California.
In addition, the Company has offshore offices. The Company leases
approximately 24,530 square feet of office space in Madras, India which serves
as its headquarters in India. This lease expires on January 12, 2002. The
Company owns a facility totaling approximately 6,625 square feet in Bangalore,
India. The Company also leases facilities in the United Kingdom, Bangalore and
Hyderabad, India.
The Company believes that these facilities are adequate for its anticipated
future needs.
LITIGATION
On February 3, 1997, the Company received a third-party complaint filed
against it and other parties by Network Six, Inc. ("NSI") in the Circuit Court
of the First Circuit for the State of Hawaii. The third-party claims are
asserted in an action that the State of Hawaii has brought against NSI. On
January 31, 1997, the Company also received an answer and counterclaim served by
NSI in an action brought by the Company against NSI in the Superior Court of the
State of Rhode Island. The Company acted as a subcontractor to NSI in connection
with the development of software for the State of Hawaii. Additionally, NSI and
the Company were parties to a letter of intent, now terminated, for the purpose
of exploring a business combination or merger. The Company's suit against NSI in
Rhode Island, as well as the State of Hawaii's suit against NSI in Hawaii, arise
from the Hawaii software project.
The allegations of NSI's third-party complaint in the Hawaii action and
NSI's counterclaim in the Rhode Island action are substantively identical. NSI
alleges that the Company wrongfully used information gained in connection with
the letter of intent to attempt to gain control of the State of Hawaii project,
interfered with NSI's relationship with the State of Hawaii, employed or
solicited the employment of NSI employees in violation of contract, and
otherwise breached contractual or other obligations to NSI. NSI seeks damages of
$481,139.79 from the Company for services and personnel allegedly provided to it
by NSI, damages of $60,000,000 predicated on a decline in the market value of
NSI's publicly-traded stock, and other unspecified losses. On May 30, 1997, the
Circuit Court of the First Circuit for the State of Hawaii granted the Company's
motion to dismiss claims asserting bad faith breach of contract with prejudice,
and conspiracy without prejudice.
The Company believes that it has not breached any contractual or other
obligation to NSI as alleged either in the third-party complaint or the
counterclaim, and that it possesses meritorious defenses or set-offs to all of
NSI's claims. The Company does not believe that NSI's actions will result in
material liability to it, or that they will have a material adverse effect on
its financial condition, business, or operations, and intends to vigorously
contest the claims asserted in both actions.
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<PAGE> 33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors and their respective ages
and positions as of June 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Rajendra B. Vattikuti................ 45 President, Chief Executive Officer and Director
Timothy S. Manney.................... 38 Executive Vice President of Finance and Administration,
Treasurer and Director
Daniel S. Rankin..................... 42 Vice President of Technical Services
Gena M. Lodolo....................... 48 Vice President of Sales
Nanjappa S. Venugopal................ 44 Director of Human Resources
Douglas S. Land...................... 40 Director
Frank D. Stella...................... 78 Director
John A. Stanley...................... 59 Director
</TABLE>
Rajendra B. Vattikuti, the founder of the Company, has served as President
and Chief Executive Officer and as a Director since the Company's formation in
February 1985. From 1983 to 1985, Mr. Vattikuti was Director of M.I.S. for
Yurika Foods Corporation. From 1977 to 1983, Mr. Vattikuti was an M.I.S. Project
Leader for Chrysler Corporation. Mr. Vattikuti holds a Bachelor of Science
degree in Electrical Engineering from the College of Engineering, Guindy (India)
and a Master of Science degree in Electrical and Computer Engineering from Wayne
State University.
Timothy S. Manney has served as Executive Vice President of Finance and
Administration and Treasurer and as a Director since November 1993. From
February 1990 to November 1993, Mr. Manney held various positions with the
Company, most recently as Chief Financial Officer. From 1980 until 1990, Mr.
Manney was an Audit Manager at Arthur Andersen LLP. He is a member of the
Michigan Association of Certified Public Accountants. Mr. Manney holds a
Bachelor of Business Administration degree from the University of Michigan.
Daniel S. Rankin has served as Vice President of Technical Services since
September 1994. From September 1990 to September 1994, Mr. Rankin served as
Director of Insurance Services for Medstat, Inc. From July 1989 to September
1990, Mr. Rankin held the position of Vice President of Turnkey Systems for the
Company. From May 1978 to July 1989, Mr. Rankin served in various positions at
Andersen Consulting, during which time he managed several large, multi-year
systems-development projects in a variety of computer hardware and software
environments. Mr. Rankin holds a Bachelor of Business Administration degree and
Master of Business Administration degree from the University of Michigan.
Nanjappa S. Venugopal has served as Director of Human Resources since
October 1996. Mr. Venugopal also served as the business unit manager for the
manufacturing sector of the Company from September 1991 to September 1996. From
December 1975 to August 1991, he held several technical and managerial positions
at Tata Consultancy Services in the U.S., Asia and Europe. From October 1988 to
August 1991, Mr. Venugopal was regional manager of Tata's New York office. Mr.
Venugopal holds a Bachelor of Mechanical Engineering degree from Bangalore
University and a Master of Aeronautical Engineering degree from the Indian
Institute of Technology.
Gena M. Lodolo has served as Vice President of Sales since June 1997. From
April 1995 to June 1997, Ms. Lodolo was an independent marketing consultant to
manufacturing companies. From January 1986 to April 1995, Ms. Lodolo held
various sales related positions at Data General Corporation, including positions
as Sales Director, Reseller Division and District Manager, Midwest Division.
From March 1982 to January 1986, Ms. Lodolo was employed by Tandem Computers,
Inc. as a District Manager. Ms. Lodolo holds a Bachelor of Arts degree from the
University of Minnesota.
Douglas S. Land has served as a Director since November 1993 and as an
advisor to the Company since 1988. Mr. Land is the founder and President of
Economic Analysis Group, Ltd., a Washington DC-based
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<PAGE> 34
consulting firm that has been providing financial and economic consulting
services since 1983. Mr. Land is also the President and founder of The
Chesapeake Group, a financial advisory firm that has been providing consulting
to start-up and middle-market firms since 1985. From January 1992 to February
1993, Mr. Land was an Executive Vice President of Hambro Resource Development
Incorporated, an affiliate of Hambros Bank London, which provides investment and
merchant banking services. Mr. Land holds a Bachelor of Science degree in
Economics, a Master of Business Administration degree in Finance and a Master of
Arts degree in International Relations from the University of Pennsylvania.
Frank D. Stella has served as a Director since November 1993. Mr. Stella
has served as President of F.D. Stella Products Company, a food service and
dining equipment company, since 1946. Mr. Stella was appointed to the Commission
for White House Fellows by President Ronald W. Reagan in 1983 and has served as
Chairman of the Income Tax Board of Review, City of Detroit, since 1965. Mr.
Stella is also a board member of VFS, Inc., an insurance holding company, and a
former board member of the Federal Home Loan Bank of Indianapolis. He is also on
the boards of several medical and charitable organizations. Mr. Stella holds a
degree from the College of Commerce and Finance at the University of Detroit.
John A. Stanley has served as a Director since June 1997. Mr. Stanley has
served as President of European Operations of Lexmark International since March
1991. Previously, he was employed by IBM for 22 years. Mr. Stanley is a graduate
of FitzWilliam College, University of Cambridge, England with a Master of Arts
degree, and holds a degree in Personnel Management from The London School of
Economics.
The Company's executive officers are appointed annually by, and serve at
the discretion of, the Board of Directors. Each executive officer is a full-time
employee of the Company. The Company's Board of Directors is divided into three
classes. The Board of Directors currently consists of five members. The Board is
divided into three classes, whose members serve for staggered three-year terms.
Rajendra Vattikuti and Timothy Manney are Class I Directors and will serve a
three-year term. Douglas Land and Frank Stella are Class II Directors and will
serve a one-year term. John Stanley is a Class III Director and will serve a
two-year term. At each annual meeting of shareholders, the appropriate number of
directors will be elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. There are no family relationships
between any director or executive officer of the Company.
BOARD COMMITTEES
The Audit Committee is responsible for reviewing with management the
financial controls, accounting, audit and reporting activities of the Company.
The Audit Committee reviews the qualifications of the Company's independent
auditors, makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the scope, fees and results of any
audit and reviews non-audit services provided by the independent auditors. The
members of the Audit Committee are Frank Stella and Douglas Land. All members of
the Audit Committee are independent directors.
The Compensation Committee is responsible for the administration of all
salary and incentive compensation plans for the officers and key employees of
the Company, including bonuses. The Compensation Committee also administers the
Company's 1996 Plan (as hereinafter defined). The members of the Compensation
Committee are Frank Stella and John Stanley. Doug Land is a non-voting member of
the Compensation Committee. All members of the Compensation Committee are
independent directors.
DIRECTOR COMPENSATION
During 1996, Mr. Land and Mr. Stella were each paid $24,000 for their
services provided as directors. During 1996, Mr. Stella was granted a
non-incentive stock option to acquire 8,913 shares of Common Stock at an
exercise price of $8.41 per share. All directors are reimbursed for travel
expenses incurred in connection with attending board and committee meetings.
Directors are not entitled to additional fees for serving on committees of the
Board of Directors. After the effective date of this offering, the Company shall
issue options each year to purchase up to 10,000 shares of Common Stock, as a
formula grant, to directors who are not executive officers of the Company.
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<PAGE> 35
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned by the Company's Chief Executive Officer and each of the other executive
officers whose salary and bonus compensation for the fiscal year ended December
31, 1996 exceeded $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER OPTIONS(#) COMPENSATION(3)
<S> <C> <C> <C> <C> <C>
Rajendra B. Vattikuti.............. $411,000 $288,000 $ 14,729(1) -- $3,800
President and Chief Executive
Officer
Timothy S. Manney.................. 150,000 50,000 2,746(2) -- 3,800
Executive Vice President of
Finance and Administration,
Treasurer
Daniel S. Rankin................... 160,000 35,000 -- -- 3,800
Vice President of Technical
Services
Nanjappa S. Venugopal.............. 100,000 35,000 -- 29,711 3,240
Director of Human Resources
Roy Ely............................ 160,621 -- -- -- --
Executive Vice President of
Sales(4)
Jennifer Grey...................... 102,102 -- -- -- 2,450
Director of Operations(4)
</TABLE>
- -------------------------
(1) Includes $3,576 representing the imputed value of certain health and life
insurance benefits provided by the Company to Mr. Vattikuti and $11,153
representing the personal use of corporate cars. Does not include benefits
from certain non-interest bearing loans outstanding during 1996. See
"Certain Transactions."
(2) Represents the imputed value of certain health and life insurance benefits
provided by the Company.
(3) Represents amount of contribution by the Company on behalf of such
individual to the Company's 401(k) Plan.
(4) No longer an employee of the Company.
The following table sets forth certain information with respect to the
grant of incentive stock options by the Company during 1996:
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
----------------------------------------------------- ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTION EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PRICE(2) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Nanjappa S. Venugopal(3)........ 29,711 10% $8.41 9/12/06 $157,142 $398,228
</TABLE>
- -------------------------
(1) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years). Assumed stock price appreciation of 5% and
10% is based on the fair value at the time of grant.
(2) The exercise price equals the fair market value of the Common Stock as of
the grant date as determined by the Board of Directors, based upon a
contemporaneous independent appraisal.
(3) Mr. Venugopal's options are exercisable in three equal annual installments
commencing on September 12, 1997.
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<PAGE> 36
The following table sets forth certain information with respect to the
stock options held at December 31, 1996 by the Named Executive Officers below
who held options during 1996:
AGGREGATED OPTION EXERCISES IN 1996 AND 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT YEAR END(#) AT YEAR END ($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Timothy S. Manney............ 267,402 $2,083,062 -- -- $-- $ --
Daniel S. Rankin............. -- -- -- 148,557 -- 1,157,259
Nanjappa S. Venugopal........ -- -- -- 29,711 -- 106,662
</TABLE>
- -------------------------
(1) Calculated based on the initial public offering price of $12.00 per share,
less the exercise price payable for such shares.
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan") provides for the granting of incentive stock options to employees within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
for the granting to employees, directors and consultants of nonstatutory stock
options. The 1996 Plan was adopted by the Board of Directors on July 10, 1996
and approved by the sole shareholder on September 10, 1996. Unless terminated
sooner, the 1996 Plan will terminate automatically on December 31, 2006. The
Board of Directors has the authority to amend, suspend or terminate the 1996
Plan, subject to any required shareholder approval under applicable law.
Notwithstanding the foregoing, no amendment, suspension or termination of the
1996 Plan, without the consent of the holder of a previously granted option, may
adversely affect such holder's right under such option.
Since the inception of the 1996 Plan, options have been granted to
approximately 75 employees and a total of 1,623,727 shares of Common Stock are
authorized for issuance pursuant to the 1996 Plan. As of the date of this
Prospectus, 617,368 shares were outstanding, and 466,266 shares remained
available for future grant under the 1996 Plan.
The 1996 Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). The Committee has the power to determine the terms
of the options granted, including the exercise price, the number of shares
subject to the option and the exercisability thereof, and the form of
consideration payable upon exercise. Options granted under the 1996 Plan are not
generally transferable by the optionee, and each option is exercisable during
the lifetime of the optionee only by such optionee. Incentive stock options
granted under the 1996 Plan must be exercised within three months of such
optionee's termination by death or within twelve months of such optionee's
termination by disability, but in no event later than the expiration of the
option's term. The exercise price of all incentive stock options granted under
the 1996 Plan must be at least equal to the fair market value of the Common
Stock on the date of grant. With respect to any employee who owns stock
possessing more than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any incentive stock option
granted to such employee must equal or exceed 110% of the fair market value of
the Common Stock on the grant date and the term of the option must not exceed
five years. The aggregate fair market value of the Common Stock (determined at
the time the option is granted) with respect to which incentive stock options
granted to an individual first become exercisable in any calendar year shall not
exceed $100,000. The term of all options (other than the incentive stock options
referred to in the second preceding sentence) may not exceed ten years.
The 1996 Plan provides that in the event of a merger, consolidation or sale
or transfer by the Company of substantially all of its assets, the date of
termination of any outstanding options and the date on or after which such
options, or any portion of such options not then exercisable may be exercised,
shall be advanced to a date fixed by the Committee which date shall be no more
than 15 days prior to the date of such merger, consolidation, sale or transfer.
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<PAGE> 37
The Company has agreed to indemnify certain holders of the options against
certain liabilities resulting from the holders' involvement with the Company.
401(k) Plan. The Company maintains a 401(k) profit sharing and defined
contribution plan (the "401(k) Plan"). All employees of the Company who have
reached 21 years of age and who have completed one year of employment are
eligible to participate in the 401(k) Plan, pursuant to which each participant
may contribute up to 18% of eligible compensation (up to a statutorily
prescribed annual limit of $9,500 in 1997). The Company matches 40% of the
contributions made by employees to the 401(k) Plan (up to 6% of eligible
compensation). All amounts contributed by employee participants and earnings on
these contributions are fully vested at all times. Employee participants may
elect to invest their contributions in various established funds.
EMPLOYMENT AGREEMENTS
In December 1996, the Company entered into an employment agreement with
Rajendra B. Vattikuti which became effective March 5, 1997, that provides for
his employment as President and Chief Executive Officer for an initial term
ending on December 31, 2001. Effective January 1, 1998, the term is
automatically extended for an additional year, unless before such date either
party shall notify the other of its refusal to extend the term, so that the term
of this agreement upon such renewal is always five years. The agreement provides
for an annual base salary of $350,000, a bonus in an amount not to exceed the
base annual salary, to be determined by the Compensation Committee, and benefits
under the Company's benefit plans. Special death and disability benefits also
are included. The agreement also provides, among other things, that, if Mr.
Vattikuti's employment is terminated by the Company with or without cause for
any reason other than willful misconduct, or by Mr. Vattikuti under certain
conditions (including a change in control as defined in the agreement), the
Company will pay to him an amount equal to 2.99 times his annual base salary and
bonus in effect immediately prior to such termination. If the Company terminates
Mr. Vattikuti's employment for any reason other than willful misconduct, the
Company is obligated to provide certain benefits to Mr. Vattikuti over a period
of time. The agreement contains a restrictive covenant that prohibits Mr.
Vattikuti from competing anywhere in the world with the Company's business
during any period in which he receives compensation and for one year after the
cessation of such compensation.
In December 1996, the Company entered into an agreement with Timothy Manney
that provides for his employment as Executive Vice President of Finance and
Administration for an initial term ending on December 31, 1999. Effective
January 1, 1998, the term is automatically extended for an additional year,
unless before such date either party shall notify the other of its refusal to
extend the term, so that the term of this agreement upon such renewal is always
three years. The agreement provides for an annual base salary of not less than
$180,000, a bonus in an amount not to exceed 60% of his base annual salary, to
be determined by the Compensation Committee, and benefits under the Company's
benefit plans. Special death and disability benefits also are included. The
agreement also provides, among other things, that, if Mr. Manney's employment is
terminated by the Company without cause, or by Mr. Manney under certain
conditions (including a change in control as defined in the agreement), the
Company will pay to him an amount equal to 2.5 times his base salary in effect
immediately prior to such termination and the greater of his most recent bonus
or the bonus received immediately prior to his most recent annual bonus. The
agreement contains a restrictive covenant that prohibits Mr. Manney from
competing anywhere in the world with the Company's business during any period in
which he receives compensation and for one year after the cessation of such
compensation.
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<PAGE> 38
CERTAIN TRANSACTIONS
In May 1997, Padmaja Vattikuti, Rajendra Vattikuti's wife, purchased 20,290
shares of Common Stock in the open market at a weighted average purchase price
of $13 1/2 per share. As a result of the previously unanticipated sale by Mr.
Vattikuti, the Company's President and Chief Executive Officer, of certain of
his shares of Common Stock in this offering, approximately $300,000 of the
proceeds of such sale (representing the difference between the cost basis of Ms.
Vattikuti's shares and the sale of 20,290 of Mr. Vattikuti's shares in this
offering at the public offering price of $28 1/4 per share) will be paid to the
Company as required under Section 16(b) of the Exchange Act.
Pursuant to an Agreement (the "Acquisition Agreement") among the Company,
JF Electra, CBS Mauritius and Mr. Vattikuti, on July 19, 1996, JF Electra
acquired a 28% interest in CBS Mauritius for approximately $4.0 million. CBS
Mauritius concurrently redeemed, for a purchase price of approximately $2.7
million, all of the shares of CBS Mauritius then owned by the Indian Investment
Trust, a revocable grantor trust of which Ms. Vattikuti was the grantor and
trustee. Also concurrently, Mr. Vattikuti made a capital contribution to CBSI of
approximately $1.1 million and loaned the Company approximately $0.6 million.
This loan, including interest of approximately $23,000 at 8.25% per annum, was
repaid on December 30, 1996.
In connection with the investment by JF Electra, the parties to the
Acquisition Agreement and CBS India entered into a Shareholders Agreement (the
"Shareholders Agreement") that gave JF Electra the right, under certain
conditions, to convert its shares of CBS Mauritius into 552,632 shares of Common
Stock. In March 1997, JF Electra converted all of its CBS Mauritius shares into
Common Stock and JF Electra sold a portion of these shares in the Company's
initial public offering. As a result of this conversion, the Shareholders
Agreement terminated.
The Company entered into two note arrangements aggregating $660,000 with
Mr. Vattikuti with a weighted average interest rate of approximately 6%. The
amount outstanding on these notes was approximately $574,000 as of December 31,
1994. These notes were repaid during 1995.
During 1994 and 1995, the Company made non-interest bearing advances
totaling approximately $87,000 and approximately $177,000, respectively, to Mr.
Vattikuti for his personal use. The outstanding advances were repaid in full in
1995. In 1996, the Company made non-interest bearing advances totaling
approximately $46,000 to Mr. Vattikuti for his personal use. The outstanding
advances were repaid by Mr. Vattikuti on December 30, 1996. In addition, during
1996 CBSI made personal loans in the aggregate amount of approximately $100,000
to Vanaja Gangavarapu. Ms. Gangavarapu is the mother-in-law of Mr. Vattikuti.
These loans were short-term, payable on demand and non-interest bearing. The
loans were repaid in February 1997. During 1997, Mr. Vattikuti made an
approximate $46,000 non-interest bearing advance to the Company. As of June 30,
1997, this advance was still outstanding.
On December 30, 1996, Timothy Manney exercised his stock options and the
Company issued an aggregate of 267,402 shares of Common Stock for an aggregate
purchase price of $1,125,000 to Mr. Manney. Pursuant to the terms of the
Nonqualified Stock Option Agreement between Mr. Manney and the Company, the
Company loaned Mr. Manney $1,125,000 to purchase the shares. The promissory note
executed by Mr. Manney provides that the loan matures on April 25, 2006 and
bears interest at the rate of 8.25% per annum. Interest on the loan is payable
on January 1 and July 1 of each year. Interest payments are not required to be
made until Mr. Manney's shares have been registered under the Securities Act.
Mr. Manney will use part of the proceeds from the sale of his shares in this
offering to repay a portion of the note.
On December 30, 1996, Douglas Land exercised his stock options and the
Company issued an aggregate of 237,691 shares of Common Stock for an aggregate
purchase price of $1,000,000 to Mr. Land. Pursuant to the terms of the
Nonqualified Stock Option Agreement between Mr. Land and the Company, the
Company loaned Mr. Land $1,000,000 to purchase the shares. The promissory note
executed by Mr. Land provides that the loan matures on April 25, 2006 and bears
interest at the rate of 8.25% per annum. Interest on the loan is payable on
January 1 and July 1 of each year. Interest payments are not required to be made
until Mr. Land's shares have been registered under the Securities Act. Mr. Land
will use part of the proceeds from the sale of his shares in this offering to
repay a portion of the note.
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<PAGE> 39
In each of the fiscal years 1994, 1995, and 1996, and for the six-month
period ended June 30, 1997, Mr. Land and certain entities affiliated with him
earned collectively approximately $226,000, $96,000, $244,000 and $12,000,
respectively, for serving as a Director and providing consulting services to the
Company. In addition, The Chesapeake Group, an entity affiliated with Mr. Land,
earned $100,000 for financial advisory services rendered in connection with this
offering, and $160,000 for financial advisory services rendered in connection
with the initial public offering on March 5, 1997.
During 1995 and 1996, CBSI provided consulting services to Little Caesars
Enterprises, of which one of the former directors of the Company is a principal
shareholder. For services rendered, the Company earned approximately $111,000 in
1995, $216,000 in 1996 and $46,000 in the six-month period ended June 30, 1997.
Subsequent to March 5, 1997, the Company distributed to certain
shareholders approximately $8.8 million from the proceeds of its initial public
offering as part of the termination of the Company's S corporation status.
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<PAGE> 40
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of August 19, 1997, and as adjusted
to reflect the sale of the shares offered hereby, by: (i) each person known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each director of the Company; (iii) each of the Named Executive
Officers; and (iv) by all executive officers and directors as a group. Except as
noted, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP
PRIOR TO OFFERING NUMBER AFTER OFFERING(1)
-------------------- OF SHARES --------------------
NUMBER OF BEING NUMBER OF
NAME SHARES PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Rajendra B. Vattikuti(2)....................... 5,942,275 63.9% 850,000 5,092,275 47.2%
JF Electra (Mauritius) Limited(3).............. 352,632 3.8% 200,000 152,632 1.4%
Timothy S. Manney.............................. 267,402 2.9% 35,000 232,402 2.2%
Douglas S. Land(4)............................. 223,430 2.4% 30,000 193,430 1.8%
Daniel S. Rankin(5)............................ 74,279 * 35,000 39,279 *
Frank D. Stella(6)............................. 9,952 * -- 9,952 *
Nanjappa S. Venugopal(7)....................... 9,903 * -- 9,903 *
John A. Stanley................................ 5,650 * -- 5,650 *
Gena M. Lodolo................................. -- -- -- -- --
Roy Ely(8)..................................... -- -- -- -- --
Jennifer Grey(8)............................... -- -- -- -- --
All directors and executive officers as a group
(8 persons).................................. 6,532,891 69.6% 950,000 5,582,891 51.5%
</TABLE>
- ------------------------------
* Less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 390,000 shares of Common Stock from the Company or the
Selling Shareholders.
(2) The address of Mr. Vattikuti is c/o Complete Business Solutions, Inc., 32605
West Twelve Mile Road, Suite #250, Farmington Hills, Michigan 48334. Does
not include 20,290 shares owned by Padmaja Vattikuti, Mr. Vattikuti's wife.
Mr. Vattikuti disclaims beneficial ownership of such shares.
(3) The address of JF Electra is 4/F Les Cascades Building, Edith Cavell Street,
Port Louis, Mauritius.
(4) Does not include 14,261 shares transferred to certain family members. Mr.
Land disclaims beneficial ownership of such shares.
(5) Includes 74,279 shares subject to options currently exercisable, 35,000 of
which will be exercised on the date of this Prospectus and sold in this
offering.
(6) Includes 4,952 shares subject to options currently exercisable.
(7) Consists of 9,903 shares subject to options which are exercisable September
12, 1997.
(8) No longer an employee of the Company.
40
<PAGE> 41
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, no par value per share, and 1,000,000 shares of preferred
stock, no par value per share ("Preferred Stock"). The following description of
the capital stock of the Company is a summary, and as such, does not purport to
be complete and is subject, and qualified in its entirety by reference to, the
more complete descriptions contained in the Restated Articles of Incorporation
of the Company, as amended (the "Articles"), and the Bylaws of the Company, as
amended, copies of each of which are incorporated by reference as exhibits to
the Registration Statement of which this Prospectus is a part. The Company
currently has outstanding 9,300,000 shares of Common Stock and no shares of
Preferred Stock. Upon completion of this offering, the Company will have
10,785,000 outstanding shares of Common Stock and no outstanding shares of
Preferred Stock. As of July 30, 1997, there were 37 record holders of Common
Stock.
COMMON STOCK
The Company's authorized common stock consists of 30,000,000 shares of
Common Stock which is traded on the Nasdaq National Market. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of shareholders. Subject to preferences that may be
applicable to outstanding shares of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Company's Board of Directors out of funds legally available therefor.
Holders of Common Stock have no preemptive, subscription or redemption rights,
and there are no conversion or similar rights with respect to such shares. The
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock, as well as to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the shareholders. The Board of Directors, without
shareholder approval, may issue Preferred Stock with voting and conversion
rights which could materially adversely affect the voting power of the holders
of Common Stock. The issuance of Preferred Stock could also decrease the amount
of earnings and assets available for distribution to holders of Common Stock. In
addition, the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. At present, the
Company has no plans to issue any shares of Preferred Stock. See "Risk Factors
- -- Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Chicago
Trust Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 10,785,000 shares
of Common Stock outstanding. Of these shares, the 2,600,000 shares sold in this
offering and the 2,500,000 shares issued in the Company's initial public
offering will be freely tradable without restriction or further registration
under the Securities Act, except for the 30,940 shares purchased by "affiliates"
in the open market and any future purchases by "affiliates" of the Company, as
that term is defined under the Securities Act ("Affiliates"), may generally only
be sold in compliance with the limitations of Rule 144 described below.
All of the remaining 5,685,000 shares of Common Stock and the 30,940 shares
purchased by the Affiliates in the open market (the Restricted Shares)
constitute restricted securities under Rule 144. Of these "Restricted Shares,"
5,701,679 will be subject to a lock-up period expiring 90 days after the date of
this
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<PAGE> 42
Prospectus (the "Lock-Up Period"). Following the Lock-Up Period, 5,701,679 of
the Restricted Shares will immediately become eligible for sale, subject,
however, to the volume limitations and restrictions (other than the holding
period requirement) of Rule 144. The remaining 14,261 Restricted Shares will
become eligible for sale under Rule 144 in December 1997. See "Underwriting."
In general, under Rule 144 of the Securities Act as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least one year, including a person who may be deemed an
Affiliate of the Company, is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then outstanding shares of Common Stock or the average weekly trading volume of
the Common Stock as reported on the Nasdaq National Market during the four
calendar weeks preceding such sale. Sales under Rule 144 are subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about the Company. In addition, under Rule 144(k), a person
who is not an Affiliate of the Company at any time 90 days preceding a sale, and
who has beneficially owned shares for at least two years, would be entitled to
sell such shares without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144.
REGISTRATION RIGHTS
The Company has entered into stock option agreements with Timothy S.
Manney, Douglas S. Land, and Daniel S. Rankin, pursuant to which the Company has
granted them certain registration rights. Pursuant to the terms of the stock
option agreements with Messrs. Manney and Land, at any time after September 5,
1997, each has the right, subject to certain restrictions set forth in their
respective agreements, to require the Company to register under the Securities
Act the Common Stock owned by such holders on the date of this offering at the
Company's expense. Pursuant to the terms of the stock option agreement with Mr.
Rankin, at any time beginning six months after he exercises his options, he will
have the right, subject to certain conditions set forth in his agreement, to
require the Company to register his Common Stock. In addition, the Company,
pursuant to the terms of the stock option agreements, agrees to indemnify
Messrs. Manney, Land and Rankin against, among other things, any and all claims,
suits, actions or proceedings and against any payments in satisfaction of any
related judgment, fine or penalty caused by or resulting from any of their acts,
omissions, negligence or wilful conduct resulting from their respective
involvement with the Company and its subsidiaries and affiliates.
The Company intends to file a registration statement on Form S-8 under the
Securities Act in September 1997 to register an aggregate of 1,083,634 shares of
Common Stock reserved for issuance under the Company's 1996 Plan. See
"Management -- Employee Benefit Plans -- 1996 Stock Option Plan." Accordingly,
shares registered under such registration statement will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market, unless such shares are subject to vesting restrictions with the Company
or the lock-up agreements described above. As of the date of this Prospectus,
options to purchase 617,368 shares of Common Stock were outstanding and 466,266
shares of Common Stock remained available for future grant under the 1996 Plan.
The Company can make no prediction as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares for sale will have
on the market price prevailing from time to time. Nevertheless, sales of
significant numbers of shares of the Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities. See "Risk Factors -- Shares Eligible for Future Sale."
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<PAGE> 43
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), have agreed severally to purchase
from the Company and the Selling Shareholders, and the Company and the Selling
Shareholders have agreed severally to sell to each of the Underwriters, an
aggregate of 2,600,000 shares of Common Stock at the public offering price per
share less the underwriting discounts and commissions set forth on the cover of
this Prospectus. The number of shares of Common Stock that each Underwriter has
agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,560,000
UBS Securities LLC.......................................... 650,000
Legg Mason Wood Walker, Incorporated........................ 390,000
---------
Total.................................................. 2,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the shares of Common Stock offered hereby are subject
to approval by their counsel of certain legal matters and to certain other
conditions. The Underwriters are obligated to purchase all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any are purchased.
The Underwriters propose to initially offer the shares of Common Stock in
part directly to the public at the price to the public set forth on the cover
page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $0.97 per share.
The Underwriters may allow, and such dealers may re-allow to certain other
dealers, a concession not in excess of $0.10 per share. After this offering, the
public offering price and other selling terms may be changed by the
Underwriters.
Pursuant to the Underwriting Agreement, the Company and certain Selling
Stockholders have granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of 390,000 additional shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus less the underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof. The Company, its executive officers and
directors and the Selling Shareholders have each agreed, subject to certain
exceptions, not to (i) offer, pledge, sell, contract to sell, engage in any
short sale, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock;
or (ii) enter into any swap or similar agreement that transfers, in whole or in
part, the economic risk of ownership of the Common Stock for a period of 90 days
after the date of this Prospectus (the "Lock-Up Period") without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In
addition, all Selling Shareholders holding registration rights have agreed that,
without the prior written consent of Donaldson Lufkin & Jenrette Securities
Corporation, will not, during the Lock-Up Period, make any demand
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<PAGE> 44
for or exercise any right with respect to, the registration of any shares of
Common Stock or any security convertible into or exercisable or exchangeable for
Common Stock.
The Chesapeake Group, an entity affiliated with Douglas Land, a shareholder
and director of the Company, earned $160,000 for financial advisory services
rendered in connection with the Company's initial public offering in March 1997
and $100,000 in connection with this offering.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two-month prior period, or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
In connection with this offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot this offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members in
this offering, if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities and may end any of these activities at any time.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby and certain
other legal matters in connection with this offering will be passed upon for the
Company by Butzel Long, Detroit, Michigan. Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Sachnoff &
Weaver, Ltd., Chicago, Illinois.
EXPERTS
The Consolidated Financial Statements as of December 31, 1995 and 1996, and
for each of the three years ended December 31, 1996, included in this Prospectus
and the Consolidated Financial Statement Schedule included in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, to the extent and for the periods as indicated in their reports
with respect thereto, and are included therein in reliance upon the authority of
said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the public reference room of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549, and at the public reference facilities at the Commission's Regional
Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
North-West Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may be obtained at prescribed rates by writing to
the Commission, Public Reference Section, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549. In addition, material filed by CBSI may be
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<PAGE> 45
inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, DC 20006. The
Registration Statement, including the exhibits and schedules thereto, may be
obtained from the Commission's web site at www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended with respect to the
shares of Common Stock offered hereby. As permitted by the rules and regulations
of the Commission, this Prospectus does not contain all the information set
forth in the Registration Statement. Such additional information may be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549. Statements contained in this Prospectus as to the contents
of any contract or other document referred to herein are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of reports,
proxy and information statements and other information regarding registrants
that file electronically are available on the Commission's web site.
GLOSSARY OF CERTAIN TECHNICAL TERMS
Architecture. A particular design for bringing together and utilizing
selected computer hardware, network systems software and applications software
to achieve an overall objective.
Client/server. The linking or networking of two or more computers to allow
multiple users to access and share information. Client/server design is
contrasted with "mainframe" design.
Conversion. The process of converting data and applications from one format
to another in connection with an organization's adoption of different, usually
more technologically advanced, hardware or software.
Distributed computing environments. The distribution of hardware and
software applications within an organization, across multiple hardware
platforms, thereby contributing to overall processing power. Distributed
computer environments can use client/server architectures or more proprietary
architectures.
Electronic Data Interchange. Industry standard methods and formats for
electronic exchange of business documents such as purchase orders.
Enterprise Resource Planning. Large, integrated application packages used
to manage information on an enterprise-wide basis.
Graphical user interface. A user interface which typically uses a mouse as
a pointing device, icons representing basic computer operations,
"what-you-see-is-what-you-get" on-screen page representation and multiple
on-screen windows. A graphical user interface is designed to make computer
applications easier to operate. Examples of graphical user interfaces are
Microsoft Windows and the Macintosh user interface.
Internet. An open global network of interconnected commercial, educational
and governmental computer networks which utilize a common communications
protocol.
Intranet. An organization's private network of its local area networks
which utilizes Internet data formats and communications protocols and which may
use the Internet's facilities as the backbone for network communications.
Legacy. As in hardware and applications, which are information technology
systems based on older proprietary technologies.
Mainframe. A centralized computer, capable of handling large amounts of
data and interfacing with numerous terminals (end-users), on which an
organization maintains information.
Migration. The process of moving applications and data from one computing
environment, such as a mainframe environment, to another, such as client/server
environment. Also called reengineering.
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<PAGE> 46
Object-oriented programming. A type of software design in which software
elements are linked together as needed to achieve the desired programming
result. This style of programming promotes re-usability of objects (data
combined with a procedural code) to improve programmer efficiency.
Operating System. The software that controls the allocation of computer
resources to various software applications in order to maximize the efficiency
of those resources.
Relational database management system (RDBMS). A particular style of
database management system in which computer data is stored in two-dimensional
tables. Each table defines the relationship between the items listed in the rows
(data records) and columns (data fields). Data from two or more tables can be
related and accessed through common data fields to permit multi-dimensional
searching.
Year 2000. Refers to the software problems resulting from the date change
on December 31, 1999 to the year 2000. Many software applications must be
modified in order to operate properly after this date.
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<PAGE> 47
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1994, 1995, and 1996......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995, and 1996............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Statements of Income for the three-
and six-month periods ended June 30, 1997 and 1996........ F-20
Condensed Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996..................................... F-21
Condensed Consolidated Statements of Shareholders' Equity
for the six-month periods ended June 30, 1996, December
31, 1996, and June 30, 1997............................... F-22
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1997 and 1996............ F-23
Notes to Condensed Consolidated Financial Statements........ F-24
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Complete Business Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Complete
Business Solutions, Inc. (a Michigan corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Complete Business Solutions,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
January 29, 1997.
(except with respect to the
matter discussed in Note 13,
as to which the date is
February 11, 1997).
F-2
<PAGE> 49
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 830 $ 3,382
Accounts receivable, net............................... 16,759 19,114
Unbilled revenues...................................... 534 1,627
Prepaid expenses and other............................. 531 1,136
------- -------
Total current assets.............................. 18,654 25,259
------- -------
Property and equipment, net................................. 3,571 5,167
Computer software, net...................................... 992 639
Other assets................................................ 206 193
------- -------
Total assets...................................... $23,423 $31,258
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 1,562 $ 2,304
Accrued payroll and related costs...................... 3,895 4,907
Revolving credit facility.............................. 5,350 5,400
Other accrued liabilities.............................. 549 961
Current portion of deferred revenue.................... 1,062 1,124
Current portion of long-term debt...................... 437 486
------- -------
Total current liabilities......................... 12,855 15,182
------- -------
Deferred revenue, less current portion...................... 299 317
Long-term debt, less current portion........................ 529 305
Minority interest........................................... 552 1,503
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued............................... -- --
Common stock, no par value, 30,000,000 shares
authorized, 5,942,275 and 6,447,368 shares issued and
outstanding as of December 31, 1995 and 1996,
respectively.......................................... -- --
Additional paid-in capital............................. 1 3,226
Retained earnings...................................... 9,346 13,049
Stock subscriptions receivable......................... -- (2,125)
Cumulative translation adjustment...................... (159) (199)
------- -------
Total shareholders' equity........................ 9,188 13,951
------- -------
Total liabilities and shareholders' equity........ $23,423 $31,258
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 50
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Professional service fees.............................. $53,696 $64,635 $80,601
Software products...................................... 2,662 2,764 2,640
------- ------- -------
Total revenues.................................... 56,358 67,399 83,241
------- ------- -------
Cost of revenues:
Salaries, wages and employee benefits.................. 35,219 45,888 53,504
Contractual services................................... 2,487 1,909 3,712
Project travel and relocation.......................... 3,144 3,126 3,458
Cost of software products sold......................... 1,802 1,879 1,546
Depreciation and amortization.......................... 184 807 1,082
------- ------- -------
Total cost of revenues............................ 42,836 53,609 63,302
------- ------- -------
Gross profit...................................... 13,522 13,790 19,939
Selling, general and administrative expenses................ 10,887 11,824 15,455
------- ------- -------
Income from operations............................ 2,635 1,966 4,484
Interest expense............................................ 345 692 539
------- ------- -------
Income before provision for income taxes and
minority interest............................... 2,290 1,274 3,945
Provision for income taxes.................................. -- -- 84
Minority interest........................................... 176 252 158
------- ------- -------
Net income........................................ $ 2,114 $ 1,022 $ 3,703
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
INFORMATION
(UNAUDITED)
(NOTE 14)
<S> <C> <C>
Net income as reported...................................... $ 1,022 $ 3,703
Pro forma incremental income tax provision.................. 135 1,260
------- -------
Pro forma net income........................................ $ 887 $ 2,443
======= =======
Pro forma net income per common share....................... $ .12 $ .32
======= =======
Pro forma weighted average shares outstanding............... 7,396 7,658
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 51
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL STOCK CUMULATIVE TOTAL
SHARES PAID-IN RETAINED SUBSCRIPTIONS TRANSLATION SHAREHOLDERS'
OUTSTANDING CAPITAL EARNINGS RECEIVABLE ADJUSTMENT EQUITY
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1993..... 5,942,275 $ 1 $ 6,210 $ -- $ -- $ 6,211
Net income..................... -- -- 2,114 -- -- 2,114
--------- ------ ------- ------- ----- -------
Balance -- December 31, 1994..... 5,942,275 1 8,324 -- -- 8,325
Net income..................... -- -- 1,022 -- -- 1,022
Translation adjustment......... -- -- -- -- (159) (159)
--------- ------ ------- ------- ----- -------
Balance -- December 31, 1995..... 5,942,275 1 9,346 -- (159) 9,188
Net income..................... -- -- 3,703 -- -- 3,703
Translation adjustment......... -- -- -- -- (40) (40)
Capital contribution........... -- 1,100 -- -- -- 1,100
Stock options exercised........ 505,093 2,125 -- (2,125) -- --
--------- ------ ------- ------- ----- -------
Balance -- December 31, 1996..... 6,447,368 $3,226 $13,049 $(2,125) $(199) $13,951
========= ====== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 52
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income.................................................. $ 2,114 $ 1,022 $ 3,703
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 1,082 1,812 2,221
Provision for doubtful accounts........................ 100 105 120
Minority interest...................................... 176 252 158
Change in assets and liabilities--
Accounts receivable and unbilled revenues............ (3,503) (3,164) (3,601)
Prepaid expenses and other........................... (170) 29 (614)
Other assets......................................... (33) (4) 12
Accounts payable..................................... 83 641 752
Accrued payroll and related costs and other accrued
liabilities....................................... 340 261 1,625
Deferred revenue..................................... 251 312 80
Other................................................ 125 -- --
------- ------- -------
Net cash provided by operating activities....... 565 1,266 4,456
------- ------- -------
Cash flows from investing activities:
Investment in computer software........................... (313) -- (566)
Purchases of property and equipment....................... (2,155) (1,618) (3,097)
Net repayments on notes receivable -- shareholder......... 54 519 4
------- ------- -------
Net cash used in investing activities........... (2,414) (1,099) (3,659)
------- ------- -------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit facility.... 1,500 (100) 50
Proceeds from issuance of long-term debt.................. 500 828 356
Payments on long-term debt................................ (257) (346) (531)
Proceeds from sale of stock in subsidiary, net............ -- -- 3,500
Repurchase of stock in subsidiary......................... -- -- (2,708)
Capital contribution...................................... -- -- 1,100
------- ------- -------
Net cash provided by financing activities....... 1,743 382 1,767
------- ------- -------
Effect of exchange rate changes on cash..................... -- (38) (12)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ (106) 511 2,552
Cash and cash equivalents at beginning of period............ 425 319 830
------- ------- -------
Cash and cash equivalents at end of period.................. $ 319 $ 830 $ 3,382
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 53
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
Complete Business Solutions, Inc. (the Company) was founded in 1985. The
Company is a worldwide provider of information technology (IT) services to large
and mid-size organizations. The Company offers its clients a broad range of IT
services, from advising clients on strategic technology plans to developing and
implementing appropriate IT solutions.
The Risk Factors on pages 6 to 13 of this Registration Statement are
incorporated herein by reference.
Common Stock
The Company, through two resolutions, has effected a 5,942-for-1 forward
stock split and an increase in the authorized capital to 30,000,000 shares of
Common Stock. Accordingly, the Company's shareholders' equity accounts and the
number of shares in the accompanying consolidated financial statements and notes
thereto have been retroactively restated to give effect to the forward stock
split and the increase in the number of authorized shares of Common Stock.
Principles of Consolidation and Organization
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in the accompanying consolidated financial statements.
Through July 1996, the Company held a 76% interest in Complete Business
Solutions (India) Private Limited (CBS India) with the remaining 24% interest
held by an entity affiliated with the Company's shareholder (affiliated entity).
In July 1996, the Company formed CBS Complete Business Solutions (Mauritius)
Limited (CBS Mauritius) and the Company and the affiliated entity each
contributed its ownership interest in CBS India for a similar interest in CBS
Mauritius.
In July 1996, CBS Mauritius sold an ownership interest to an unrelated
entity for approximately $3,500, net of transaction costs. Simultaneously, CBS
Mauritius repurchased its stock held by the affiliated entity for approximately
$2,708 and the Company made a capital contribution of $1,708 to CBS Mauritius.
The net loss on this transaction was not material. As of December 31, 1996, the
Company owns 72% and the unrelated entity owns 28% of CBS Mauritius, which owns
100% of CBS India.
The 28% shareholder of CBS Mauritius has an option to convert its ownership
interest in CBS Mauritius into an 8.5% ownership interest in the Company during
the option period as specified in the CBS Mauritius shareholders' agreement.
This 8.5% ownership interest was calculated based upon the outstanding shares of
the Company on the date of the shareholders' agreement. This option will be
exercised in connection with the Company's contemplated initial public offering.
Upon conversion, the Company will issue additional shares of Common Stock and
acquire all outstanding minority shares of CBS Mauritius. The acquisition of the
minority shares will be accounted for under the purchase method of accounting.
The excess of the aggregate purchase price over the fair value of the net assets
acquired will be recognized as goodwill. See Note 16 for further discussion on
the pro forma effects of this transaction.
Foreign Currency
For significant foreign operations, the local currencies have been
designated as the functional currencies. The financial statements of these
subsidiaries are translated into U.S. dollars using exchange rates in effect at
year end for assets and liabilities and at the average rate during the year for
revenues and expenses. The resulting foreign currency translation adjustment is
reflected as a separate component of shareholders' equity
F-7
<PAGE> 54
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as of December 31, 1995 and 1996. The translation adjustment for the year ended
December 31, 1994 was not material.
Transaction gains and losses, which were not significant in the years
presented, are reflected in the consolidated statements of income.
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid money market
funds with an initial maturity of three months or less.
Financial Instruments
The fair values and carrying amounts of certain of the Company's financial
instruments, primarily accounts receivable and payable, are approximately
equivalent. These financial instruments are classified as current and will be
liquidated within the next operating cycle.
The carrying amount for the revolving credit facility and certain long-term
debt approximates fair value due to the variable rate of interest on these
notes. The fair value of the fixed-rate debt, which approximates the carrying
value, has been estimated based on current rates offered to the Company for debt
of the same remaining maturities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the expected life of the asset or term
of the lease, whichever is shorter.
Revenue Recognition
The Company recognizes professional service fee revenue on
time-and-materials contracts as the services are performed for the clients.
Revenues on fixed-priced contracts are recognized using the percentage of
completion method. Percentage of completion is determined by relating the actual
cost of work performed to date to the estimated total cost for each contract. If
the estimate indicates a loss on a particular contract, a provision is made for
the entire estimated loss without reference to the percentage of completion.
Retainages, which are not material for any of the years presented, are included
in accounts receivable in the accompanying consolidated balance sheets. The
Company does not have significant contracts whose original duration is in excess
of twelve months.
Software products revenue consists of both license revenue and maintenance
revenue. License revenue is recognized when both a software license agreement is
signed and the software has been shipped and made available to the customer.
Maintenance revenue is recorded as deferred revenue in the consolidated balance
sheets when invoiced and is recognized over the term of the maintenance
contract, generally one year.
Unbilled Revenues
Unbilled revenues represent costs incurred and related earnings not
currently billable under the terms of the contract. These amounts are expected
to be billed and collected over a period of less than twelve months.
Computer Software
The Company performs research to develop software for various business
applications. The costs of such research are charged to expense when incurred.
When the technological feasibility of the product is established, subsequent
costs are capitalized and amortized using the straight-line method over the
estimated economic life of the product, generally three years. The establishment
of technological feasibility and the
F-8
<PAGE> 55
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ongoing assessment of the recoverability of these costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenue, estimated economic
product lives and changes in software and hardware technology. The policy is
reevaluated and adjusted as necessary at the end of each accounting period. On
an ongoing basis, management reviews the valuation and amortization of
capitalized development costs. As part of this review, the Company considers the
value of future cash flows attributable to the capitalized development costs in
evaluating potential impairment of the asset. The amortization of software
development costs was $371, $551 and $719 for the years ended December 31, 1994,
1995 and 1996, respectively.
Accumulated amortization on computer software amounted to $1,392 and $2,111
as of December 31, 1995 and 1996, respectively.
Amounts capitalized were $313 and $566 for the years ended December 31,
1994 and 1996, respectively. No amounts were capitalized during the year ended
December 31, 1995.
Amounts charged to expense for research and development of computer
software were not material in the periods presented.
Cost of Software Products Sold
Cost of software products sold includes salaries, contractual services,
project travel and amortization expense related to the Company's software
products.
Income Taxes
The Company and its shareholders have elected to be taxed under the
provisions of Sub-Chapter S of the United States Internal Revenue Code. Under
those provisions, the shareholders are liable for individual Federal income
taxes on the Company's taxable income. As a result, no provision for United
States income taxes has been included in the accompanying consolidated
statements of income.
CBS Mauritius is incorporated in Mauritius and is not subject to income
taxes. CBS India is an Indian corporation subject to income taxes. CBS India's
operating facilities are located in a free trade zone. Under the Indian Income
Tax Act of 1961, the entire profits of a company situated in a free trade zone
are exempt from income tax for a period of five consecutive years within the
first eight years of operations, at the option of the Company. The Company has
opted for this exemption for the years ended March 31, 1992 to March 31, 1996
for its original facility in India. Two other facilities were opened during 1995
and 1996. These facilities may be exempt from income tax until 2002 and 2003,
respectively. CBS India also receives various export deductions at all three
facilities reducing its regular taxable income. As a result, other than the
minimum alternative tax discussed below, no tax provision related to the CBS
India income has been required.
During 1996, the government of India instituted a minimum alternative tax
with an effective rate of approximately 13% of CBS India's income. This tax
provision has been included in the consolidated statement of income for the year
ended December 31, 1996 as a provision for income taxes.
Termination of S Corporation Election
Certain events, including the public offering of the Company's Common
Stock, will automatically terminate its S corporation status, thereby subjecting
future income to Federal and state income taxes at the corporate level. Due to
temporary differences in recognition of revenue and expenses, income for
financial reporting purposes has exceeded income for income tax purposes.
Accordingly, the application of the provisions of SFAS No. 109, "Accounting for
Income Taxes" will result in the recognition of deferred tax liabilities and a
corresponding charge to expense in the period in which the initial public
offering occurs. If the S corporation status had been terminated as of December
31, 1996, this liability would have been approximately $4,982. As a result of
certain tax elections made by the Company, approximately $3,876 of this
F-9
<PAGE> 56
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability will be payable by the shareholders. The remaining liability of
approximately $1,106 will be paid by the Company in 1997. This liability has
been reflected as deferred taxes in the accompanying consolidated pro forma
balance sheet as of December 31, 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Allowance for doubtful accounts was $162 and $214 at December 31, 1995 and
1996, respectively.
The Company's largest client represents 18%, and 5% of accounts receivable
as of December 31, 1995 and 1996, respectively, and represents 29%, 19% and 12%
of total revenues for the years ended December 31, 1994, 1995 and 1996,
respectively. Revenues from this client are generated by multiple projects for
various end users. No other client accounted for more than 10% of total revenues
for the three years ended December 31, 1996. In addition, 80%, 82% and 84% of
total revenues in each year for the years ended December 31, 1994, 1995 and
1996, respectively, were generated from existing clients from the previous
fiscal year.
The Company grants credit to clients based upon management's assessment of
their creditworthiness. Substantially all of the Company's revenues (and the
resulting accounts receivable) are from large and mid-size companies, major
systems integrators and governmental agencies.
3. PROPERTY AND EQUIPMENT
As of December 31, 1995 and 1996, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
----------------- USEFUL
1995 1996 LIVES
<S> <C> <C> <C>
Equipment................................................ $ 4,422 $ 5,549 3-5 years
Buildings................................................ 58 986 31 years
Purchased software....................................... 1,432 1,915 3-5 years
Furniture and fixtures................................... 656 970 5-7 years
Leasehold improvements................................... 230 340 5 years
Automobiles.............................................. 84 219 5 years
------- -------
6,882 9,979
Accumulated depreciation................................. (3,311) (4,812)
------- -------
Property and equipment, net.............................. $ 3,571 $ 5,167
======= =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
During July 1996, a shareholder loaned $608 to the Company in exchange for
a note. The note was short-term and bore interest at 8.25%. This note and
accrued interest of $23 were repaid in December 1996.
During 1996, CBS India loaned approximately $100 to a related party. This
loan was short-term, payable on demand and noninterest bearing.
F-10
<PAGE> 57
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into two note arrangements aggregating $660 with a
shareholder with a weighted average interest rate of approximately 6%. The
amount outstanding on the notes was $574 as of December 31, 1994. These notes
were repaid during 1995.
During 1994 and 1995, the Company made non-interest bearing advances
totaling $87 and $177, respectively, to a shareholder. The outstanding advances
were repaid in 1995. In 1996, the Company made non-interest bearing advances of
$46 to the same shareholder for his personal use. The outstanding advances were
repaid by the shareholder in December, 1996.
The Company provided services to a client whose principal shareholder was a
former director of the Company. The Company earned approximately $111 and $216
for these services in 1995 and 1996, respectively. No services were provided to
this client for the year ended December 31, 1994.
The Company incurred approximately $135 and $182 for the years ended
December 31, 1994 and 1996, respectively, for consulting services provided by an
affiliate of an outside director. No consulting services were provided to the
Company by the director's affiliate during 1995.
The above transactions were at prices and terms believed to be equivalent
to those available from unrelated parties.
See Note 1 for additional related party disclosures.
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest for the years ended December 31, 1994, 1995 and 1996
was $404, $705 and $553, respectively. Cash paid for income taxes for the year
ended December 31, 1996 was $134. There were no income taxes paid during 1994
and 1995.
6. REVOLVING CREDIT FACILITY
Under a credit arrangement with a commercial bank, the Company may borrow
an amount not to exceed the lesser of $16,000 or 80% of trade accounts
receivable less than 90 days outstanding at the bank's prime interest rate, or a
Eurodollar rate. At December 31, 1995 and 1996, the permitted borrowings under
the agreement were approximately $10,500, and $15,187, respectively. The
borrowings under the facility are short-term, payable on demand and are secured
by trade accounts receivable of the Company.
The balance outstanding under this agreement at December 31, 1995 and 1996
was $5,350 and $5,400, respectively. Average month-end outstanding borrowings
under these arrangements were $4,862, $7,231 and $5,988 for the years ended
December 31, 1994, 1995 and 1996, respectively. The weighted average interest
rate on the outstanding borrowings was 7.9% and 7.7% at December 31, 1995 and
1996, respectively.
The Company also has a working capital facility and an equipment
line-of-credit aggregating $3,000 and $2,000, respectively, with a commercial
bank at the bank's prime interest rate (8.5% and 8.25% at December 31, 1995 and
1996, respectively). The borrowings under the facility and the equipment
line-of-credit are short-term, payable on demand and secured by all assets of
the Company. No amounts have been borrowed under the working capital facility or
the equipment line-of-credit during the years presented.
The credit agreements contain various restrictive covenants which, among
other items, require the Company to maintain certain levels of tangible net
worth and a current ratio.
F-11
<PAGE> 58
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
As of December 31, 1995 and 1996, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Note payable to a bank, payable in monthly installments of
$15 plus interest at 9.6% through March, 1988
collateralized by equipment............................... $ 408 $ 219
Note payable to a bank, payable in monthly installments of
$14 plus interest at prime plus .25% (8.75% and 8.5% at
December 31, 1995 and 1996, respectively) through July
1997, collateralized by equipment......................... 278 97
Note payable to a bank, payable in monthly installments of
$8 plus interest at prime (8.5% and 8.25% at December 31,
1995 and 1996, respectively) through August 1998,
collateralized by equipment............................... 262 159
Note payable to a bank, payable in monthly installments of
$10 plus interest at prime (8.25% at December 31, 1996)
through August 1999, collateralized by equipment.......... -- 316
Other....................................................... 18 --
----- -----
966 791
Less -- Current portion..................................... (437) (486)
----- -----
$ 529 $ 305
===== =====
</TABLE>
Maturities of the principal amounts outstanding at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997........................................................ $486
1998........................................................ 226
1999........................................................ 79
----
$791
====
</TABLE>
8. SELF-INSURANCE
The Company is self-insured for health and dental benefits up to $70 per
occurrence. Insurance coverage is carried for risks in excess of this amount.
The Company has recognized health and dental benefits expense of approximately
$1,702, $1,691 and $2,266 for the years ended December 31, 1994, 1995 and 1996,
respectively. Estimated claims incurred but not reported were $282 and $300 as
of December 31, 1995 and 1996, respectively, and are included in other accrued
liabilities in the accompanying consolidated balance sheets. There are no
receivables from insurance carriers as of December 31, 1995 and 1996.
9. LEASES
The Company leases its headquarters, regional offices, equipment and
certain automobiles under noncancelable, long-term operating leases.
F-12
<PAGE> 59
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the years ended December 31, 1994, 1995 and 1996 amounted
to approximately $720, $1,005, and $1,030, respectively. The future minimum
lease payments required under these operating leases for the years ending
December 31, are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 970
1998........................................................ 828
1999........................................................ 904
2000........................................................ 938
2001........................................................ 942
Thereafter.................................................. 1,356
------
$5,938
======
</TABLE>
10. STOCK OPTIONS
The Company maintains a Stock Option Plan (the Plan). Under the Plan,
eligible employees and directors may be granted either Incentive Stock Options
(ISOs) or Non-Incentive Stock Options (NISOs) at the discretion of the Board of
Directors. There are 1,623,727 shares of Common Stock authorized for grant under
the Plan. Options under the Plan are granted at fair value on the date of grant
as determined by an independent appraisal, therefore, no compensation expense
has been recognized. The options vest over periods ranging from one to four
years.
The stock option agreements provide for the option holder to exercise the
options in exchange for a promissory note payable to the Company over a period
of at least five years for NISOs and at least two years for ISOs. These notes
are full recourse and bear interest at the prime rate of interest determined at
the date of exercise. In December 1996, 505,093 NISOs were exercised. In
connection therewith, the Company loaned the option holders approximately $2,125
to purchase the shares, which has been reflected as stock subscriptions
receivable as of December 31, 1996 in the shareholders' equity section of the
accompanying consolidated balance sheet. The promissory notes executed by the
option holders provide that the loans mature on April 25, 2006 and bear interest
at the rate of 8.25% per annum. Interest on the loans is payable on January 1
and July 1 of each year. Interest payments are not required to be made until the
shares have been registered under the Securities Act.
The Company has elected to provide the pro forma disclosures, as permitted
under the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the Plan within the accompanying consolidated statements of
income. Had compensation expense for the Plan been determined based on the fair
value at the grant date for awards in 1995 and 1996 consistent with the
provisions of SFAS No. 123, the Company's pro forma net income and pro forma net
income per common share would have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Pro forma net income --
As reported............................................... $887 $2,443
SFAS No. 123 pro forma.................................... 772 1,844
Pro forma net income per common share --
As reported............................................... .12 .32
SFAS No. 123 pro forma.................................... .10 .24
</TABLE>
F-13
<PAGE> 60
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Plan at December 31, 1995 and 1996 and
changes during the years then ended is presented in the table below:
<TABLE>
<CAPTION>
1995 1996
------------------- --------------------
WTD. AVG. WTD. AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding, beginning of year................ -- $ -- 668,506 $4.21
Granted....................................... 668,506 4.21 297,411 8.41
Exercised..................................... -- -- (505,093) 4.21
------- ----- -------- -----
Outstanding, end of year...................... 668,506 $4.21 460,824 $6.92
======= ===== ======== =====
Exercisable, end of year...................... -- $ -- 4,952 $4.21
======= ===== ======== =====
Weighted average fair value of options
granted..................................... $1.11 $1.90
======= ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
the 1995 and 1996 grants: risk-free rate of interest of 6.20% and 7.04%,
respectively; dividend yield of 0%; and expected lives of 10 years.
11. BENEFIT PLAN
The Company maintains the Complete Business Solutions, Inc. Incentive
Savings Plan and Trust (the 401(k) Plan). All employees of the Company are
eligible to participate in the 401(k) Plan once they have completed one year of
service and have attained age 21.
The 401(k) Plan is a defined contribution plan, qualified as a profit
sharing plan under Section 401(k) of the Internal Revenue Code. The 401(k) Plan
allows eligible employees to contribute up to 18% of their compensation with the
Company matching a percentage of the contributions. The matching contribution
percentages and maximum Company match (as a percentage of the participant's
compensation) for each plan year are as follows:
<TABLE>
<CAPTION>
MATCHING MAXIMUM
COMPANY COMPANY
CONTRIBUTION MATCH
<S> <C> <C>
1994........................................................ 30% 1.8%
1995........................................................ 40% 2.4%
1996........................................................ 40% 2.4%
</TABLE>
Matching contributions made by the Company amounted to approximately $183,
$301 and $406 for the years ended December 31, 1994, 1995 and 1996,
respectively. The Company may also make an additional contribution, at its
discretion, to the 401(k) Plan. No such additional contributions have been made
to date.
F-14
<PAGE> 61
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. GEOGRAPHIC OPERATIONS INFORMATION
The following table summarizes selected financial information of the
Company's operations by geographic location:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
<S> <C> <C> <C>
Revenues --
United States.......................................... $55,220 $65,906 $80,678
India.................................................. 1,885 3,390 3,399
Other international.................................... 760 1,196 2,350
Intersegment........................................... (1,507) (3,093) (3,186)
------- ------- -------
Total............................................... $56,358 $67,399 $83,241
======= ======= =======
Income From Operations --
United States.......................................... $ 1,927 $ 846 $ 3,708
India.................................................. 568 897 680
Other international.................................... 140 223 96
------- ------- -------
Total............................................... $ 2,635 $ 1,966 $ 4,484
======= ======= =======
Identifiable Assets --
United States.......................................... $19,509 $21,607 $23,838
India.................................................. 980 1,320 3,966
Other international.................................... 251 496 3,454
------- ------- -------
Total............................................... $20,740 $23,423 $31,258
======= ======= =======
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company has received a third-party complaint filed against it and other
parties on February 3, 1997, by Network Six, Inc. ("NSI") in the Circuit Court
of the First Circuit for the State of Hawaii. The third-party claims are
asserted in an action that the State of Hawaii has brought against NSI. The
Company has also received an answer and counterclaim, dated January 31, 1997,
served by NSI in an action brought by the Company against NSI in the Superior
Court of the State of Rhode Island. The Company acted as a subcontractor to NSI
in connection with the development of software for the State of Hawaii.
Additionally, NSI and the Company were parties to a letter of intent, now
terminated, for the purpose of exploring a business combination or merger. The
Company's suit against NSI in Rhode Island, as well as the State of Hawaii's
suit against NSI in Hawaii, arise from the Hawaii software project.
The allegations of NSI's third-party complaint in the Hawaii action and
NSI's counterclaim in the Rhode Island action are substantively identical. NSI
alleges that the Company wrongfully used information gained in connection with
the letter of intent to attempt to gain control of the State of Hawaii project,
interfered with NSI's relationship with the State of Hawaii, employed or
solicited the employment of NSI employees in violation of contract, and
otherwise breached contractual or other obligations to NSI. NSI seeks damages of
approximately $481 from the Company for services and personnel allegedly
provided to it by NSI, damages of $60,000 predicated on a decline in the market
value of NSI's publicly-traded stock, and other unspecified losses.
The Company believes that it has not breached any contractual or other
obligation to NSI as alleged either in the third-party complaint or the
counterclaim, and that it possesses meritorious defenses or set-offs to all of
NSI's claims. The Company does not believe that NSI's actions will result in
material liability to it, or that they will have a material adverse effect on
its financial condition, business, or operations, and intends to vigorously
contest the claims asserted in both actions.
F-15
<PAGE> 62
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is also, from time to time, a party to ordinary, routine
litigation incidental to the Company's business. After discussion with its legal
counsel, the Company does not believe that the ultimate resolution of any other
existing matter will have a material adverse effect on its financial condition,
results of operations or cash flows.
14. PRO FORMA AND SUPPLEMENTAL NET INCOME PER COMMON SHARE (UNAUDITED)
Pro Forma Statement of Income Information
The pro forma adjustments for the incremental income tax provision included
in the accompanying consolidated statements of income reflects the additional
provision for Federal and state income taxes at the effective income tax rate as
if the Company had been taxed as a C corporation and no foreign tax holidays had
been granted during the periods presented. The differences between the United
States Federal statutory rate and the consolidated effective rate are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1995 1996
<S> <C> <C>
Statutory Federal income tax rate........................... 34.0% 34.0%
State income taxes, net of Federal tax effect............... 3.0 3.0
Tax rate differences on foreign earnings not subject to U.S.
tax....................................................... (26.6) (2.4)
Other....................................................... 2.8 0.9
------ -----
13.2% 35.5%
====== =====
</TABLE>
The Company considers all undistributed earnings of foreign subsidiaries to
be permanently invested. Therefore, no United States income taxes have been
provided on these earnings.
Pro forma weighted average shares outstanding is based on the following:
(i) the weighted average number of shares of Common Stock outstanding; (ii) the
dilutive effect of outstanding Common Stock equivalents; (iii) the stock options
and convertible shares issued during the twelve months immediately preceding the
offering date (using the treasury stock method and the proposed initial public
offering price per share) for all periods presented; and (iv) the sale of a
sufficient number of shares of the Company's common stock necessary to provide
funds to pay the cash portion of the S corporation distribution.
Pro forma fully diluted earnings per share approximates primary earnings
per share for the years ended December 31, 1995 and 1996.
Supplemental
Supplemental net income per common share reflects: (i) pro forma net
income; (ii) the elimination of interest expense related to the use of proceeds,
net of related income tax effects using an assumed effective tax rate; and (iii)
the issuance of shares of Common Stock, the net proceeds of which are used to
repay indebtedness. Supplemental net income for the years ended December 31,
1995 and 1996 was $1,515, and $2,836, respectively. Supplemental net income per
common share for the same periods was $.19, and $.35, respectively.
15. SUBSEQUENT EVENTS (UNAUDITED)
In connection with the proposed initial public offering by the Company,
subsequent to December 31, 1996, the following transactions are anticipated to
occur:
(i) termination of the Company's S corporation status as described in
Note 1. In connection with this termination, the Company will be required
to record deferred tax liabilities with a corresponding tax provision in
accordance with SFAS 109 in the period the termination occurs; and
F-16
<PAGE> 63
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) the issuance of 552,632 shares of the Company's Common Stock in
exchange for the 28% minority interest in CBS Mauritius.
16. INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (UNAUDITED)
On December 20, 1996, the Company filed a Registration Statement on Form
S-1 with the Securities and Exchange Commission for the sale of its Common
Stock. The net proceeds to the Company from this offering are intended to be
used for: payment of undistributed S corporation earnings estimated to be
$9,000; the repayment of existing debt, estimated to be $3,000 at the closing
date ($6,191 at December 31, 1996); expansion of existing operations, including
the Company's offshore software development operations; development of new
service lines and possible acquisitions of related businesses; and general
corporate purposes, including working capital.
The unaudited pro forma consolidated balance sheet shown below as of
December 31, 1996 gives effect to the following transactions as if such
transactions occurred on that date: (i) the sale of shares of Common Stock by
the Company, at the initial public offering price of $12.00 per share and the
application of the estimated net proceeds therefrom; (ii) recording of deferred
tax liabilities upon termination of the Company's S corporation status; (iii)
the transfer of undistributed retained earnings to additional paid-in capital;
and (iv) issuance of 552,632 shares of Common Stock in exchange for the 28%
minority interest in CBS Mauritius, including the elimination of the minority
interest.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 3,382 $ 9,077 $12,459
Other............................................... 21,877 -- 21,877
------- -------- -------
Total current assets........................... 25,259 9,077 34,336
------- -------- -------
Property and equipment, net........................... 5,167 -- 5,167
Computer software, net................................ 639 -- 639
Goodwill.............................................. -- 2,931 2,931
Other assets.......................................... 193 -- 193
------- -------- -------
Total assets................................... $31,258 $ 12,008 $43,266
======= ======== =======
Current liabilities:
Current portion of long-term debt................... $ 486 $ (486) $ --
Revolving credit facility........................... 5,400 (5,400) --
Deferred taxes...................................... -- 767 767
Other............................................... 9,296 -- 9,296
------- -------- -------
Total current liabilities...................... 15,182 (5,119) 10,063
------- -------- -------
Deferred revenue, less current portion................ 317 -- 317
Long-term debt, less current portion.................. 305 (305) --
Deferred taxes........................................ -- 339 339
Minority interest..................................... 1,503 (1,503) --
Shareholders' equity:
Common and preferred stock.......................... -- -- --
Additional paid-in capital.......................... 3,226 31,645 34,871
Retained earnings................................... 13,049 (13,049) --
Stock subscriptions receivable...................... (2,125) -- (2,125)
Cumulative translation adjustment................... (199) -- (199)
------- -------- -------
Total shareholders' equity..................... 13,951 18,596 32,547
------- -------- -------
Total liabilities and shareholders' equity..... $31,258 $ 12,008 $43,266
======= ======== =======
</TABLE>
F-17
<PAGE> 64
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma consolidated statements of income shown below for
the years ended December 31, 1995 and 1996, give effect to the following
transactions as if such transactions had occurred as of the beginning of the
periods:
(i) amortization of goodwill over a period of 20 years as a result
of the Company's purchase of the 28% minority interest in CBS Mauritius,
including the elimination of the minority interest;
(ii) elimination of interest expense to give effect to the repayment
of the Company's revolving credit facility and long-term debt;
(iii) provision for Federal and state income taxes at the effective
income tax rate as if the Company had been taxed as a C corporation and no
foreign tax holidays had been granted during the periods presented. The tax
provision was computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996
<S> <C> <C>
Statutory Federal income tax rate........................... 34.0% 34.0%
State income taxes, net of Federal tax effect............... 1.7 2.7
Tax rate differences on foreign earnings not subject to U.S.
tax....................................................... (19.6) (3.0)
Amortization of goodwill.................................... 3.4 1.4
Other....................................................... 1.6 0.8
----- ----
21.1% 35.9%
===== ====
</TABLE>
F-18
<PAGE> 65
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(iv) reflects pro forma weighted average shares of Common Stock, plus
the portion of Common Stock sold in the Company's initial public offering
needed to generate proceeds sufficient to repay the Company's revolving
credit facility and long-term debt at the end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
PRO
HISTORICAL ADJUSTMENTS FORMA
<S> <C> <C> <C>
Revenues............................................ $67,399 $ -- $ 67,399
Cost of revenues.................................... 53,609 -- 53,609
------- ------ ----------
Gross profit...................................... 13,790 -- 13,790
Selling, general and administrative expenses........ 11,824 -- 11,824
Amortization of goodwill............................ -- 147 147
------- ------ ----------
Income from operations............................ 1,966 (147) 1,819
Interest expense (income)........................... 692 (724) (32)
------- ------ ----------
Income before provision for income taxes and
minority interest.............................. 1,274 577 1,851
Provision for income taxes.......................... -- 391 391
Minority interest................................... 252 (252) --
------- ------ ----------
Net income........................................ $ 1,022 $ 438 $ 1,460
======= ====== ==========
Pro forma net income per share...................... $ .18
==========
Pro forma weighted average shares outstanding....... 7,961,000
==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------
PRO
HISTORICAL ADJUSTMENTS FORMA
<S> <C> <C> <C>
Revenues............................................ $83,241 $ -- $ 83,241
Cost of revenues.................................... 63,302 -- 63,302
------- ------ ----------
Gross profit...................................... 19,939 -- 19,939
Selling, general and administrative expenses........ 15,455 -- 15,455
Amortization of goodwill............................ -- 147 147
------- ------ ----------
Income from operations............................ 4,484 (147) 4,337
Interest expense (income)........................... 539 (610) (71)
------- ------ ----------
Income before provision for income taxes and
minority interest.............................. 3,945 463 4,408
Provision for income taxes.......................... 84 1,498 1,582
Minority interest................................... 158 (158) --
------- ------ ----------
Net income........................................ $ 3,703 $ (877) $ 2,826
======= ====== ==========
Pro forma net income per share...................... $ .34
==========
Pro forma weighted average shares outstanding....... 8,213,000
==========
</TABLE>
F-19
<PAGE> 66
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................................ $26,662 $20,420 $50,937 $39,548
Cost of revenues:
Salaries, wages and employee benefits................. 15,774 13,566 30,490 26,103
Contractual services.................................. 2,137 777 3,905 1,496
Project travel and relocation......................... 1,275 793 2,345 1,488
Depreciation and amortization......................... 293 382 657 715
------- ------- ------- -------
Total cost of revenues........................ 19,479 15,518 37,397 29,802
------- ------- ------- -------
Gross profit.................................. 7,183 4,902 13,540 9,746
Selling, general and administrative expenses............ 4,809 3,618 9,385 7,231
------- ------- ------- -------
Income from operations........................ 2,374 1,284 4,155 2,515
Interest expense (income)............................... (313) 159 (378) 300
------- ------- ------- -------
Income before provision for income taxes and
minority interest........................... 2,687 1,125 4,533 2,215
Provision for income taxes.............................. 856 19 1,991 36
Minority interest....................................... -- 78 82 113
------- ------- ------- -------
Net income.................................... $ 1,831 $ 1,028 $ 2,460 $ 2,066
======= ======= ======= =======
<CAPTION>
PRO FORMA INFORMATION
(UNAUDITED)
-----------------------------
<S> <C> <C> <C> <C>
Net income as reported.................................. $ 1,028 $ 2,460 $ 2,066
Adjustment to provision for income taxes................ 385 (560) 759
------- ------- -------
Net income.............................................. $ 643 $ 3,020 $ 1,307
======= ======= =======
Net income per common share............................. $ .19 $ .08 $ .35 $ .17
======= ======= ======= =======
Weighted average shares outstanding..................... 9,600 7,627 8,712 7,576
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-20
<PAGE> 67
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $17,763 $ 3,382
Accounts receivable, net.................................. 21,141 20,741
Prepaid expenses and other................................ 1,303 1,136
------- -------
Total current assets................................... 40,207 25,259
------- -------
Property and equipment, net................................. 5,076 5,167
Goodwill, net............................................... 2,882 --
Other assets................................................ 613 832
------- -------
Total assets........................................... $48,778 $31,258
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,051 $ 2,304
Accrued payroll and related costs......................... 5,405 4,907
Revolving credit facility................................. -- 5,400
Distribution and loan payable to shareholders............. 422 --
Current portion of deferred revenue....................... 1,866 1,124
Current portion of long-term debt......................... -- 486
Other accrued liabilities................................. 1,951 961
------- -------
Total current liabilities.............................. 12,695 15,182
------- -------
Deferred revenue, less current portion...................... 262 317
Long-term debt, less current portion........................ -- 305
Deferred taxes.............................................. 300 --
Minority interest........................................... -- 1,503
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued................................ -- --
Common stock, no par value, 30,000,000 shares authorized,
9,300,000 and 6,447,368 shares issued and outstanding
as of June 30, 1997 and December 31, 1996,
respectively........................................... -- --
Additional paid-in capital................................ 35,803 3,226
Retained earnings......................................... 2,117 13,049
Stock subscriptions receivable............................ (2,125) (2,125)
Cumulative translation adjustment......................... (274) (199)
------- -------
Total shareholders' equity............................. 35,521 13,951
------- -------
Total liabilities and shareholders' equity............. $48,778 $31,258
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-21
<PAGE> 68
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL STOCK CUMULATIVE TOTAL
SHARES PAID-IN RETAINED SUBSCRIPTIONS TRANSLATION SHAREHOLDERS'
OUTSTANDING CAPITAL EARNINGS RECEIVABLE ADJUSTMENT EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1995.... 5,942,275 $ 1 $ 9,346 $ -- $(159) $ 9,188
Net income...................... -- -- 2,066 -- -- 2,066
Translation adjustment.......... -- -- -- -- (27) (27)
--------- ------- -------- ------- ----- -------
Balance -- June 30, 1996........ 5,942,275 1 11,412 -- (186) 11,227
--------- ------- -------- ------- ----- -------
Net income...................... -- -- 1,637 -- -- 1,637
Translation adjustment.......... -- -- -- -- (13) (13)
Capital contribution............ -- 1,100 -- -- -- 1,100
Stock options exercised......... 505,093 2,125 -- (2,125) -- --
--------- ------- -------- ------- ----- -------
Balance -- December 31, 1996.... 6,447,368 3,226 13,049 (2,125) (199) 13,951
--------- ------- -------- ------- ----- -------
Net income...................... -- -- 2,460 -- -- 2,460
Translation adjustment.......... -- -- -- -- 2 2
Conversion of minority
shareholder................... 552,632 4,593 -- -- (77) 4,516
Initial public offering, net.... 2,300,000 23,792 -- -- -- 23,792
Distribution to shareholders.... -- -- (9,200) -- -- (9,200)
Recapitalization................ -- 4,192 (4,192) -- -- --
--------- ------- -------- ------- ----- -------
Balance -- June 30, 1997........ 9,300,000 $35,803 $ 2,117 $(2,125) $(274) $35,521
========= ======= ======== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-22
<PAGE> 69
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $ 2,460 $ 2,066
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,195 1,098
Provision for doubtful accounts........................... 150 60
Minority interest......................................... 82 113
Change in assets and liabilities --
Accounts receivable.................................... (550) (3,815)
Prepaid expenses and other............................. (167) (103)
Accounts payable....................................... 747 (68)
Accrued payroll and related costs and other
liabilities........................................... 1,574 504
Deferred revenue....................................... 687 150
Other.................................................. 303 (2)
------- -------
Net cash provided by operating activities............ 6,481 3
------- -------
Cash flows from investing activities:
Investment in computer software........................... -- (407)
Purchases of property and equipment....................... (876) (1,019)
------- -------
Net cash used in investing activities................ (876) (1,426)
------- -------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit facility.... (5,400) 1,500
Payments on long-term debt................................ (791) (259)
Net proceeds from issuance of common stock................ 23,792 --
S corporation distribution................................ (8,825) --
------- -------
Net cash provided by financing activities............ 8,776 1,241
------- -------
Effect of exchange rate changes on cash..................... -- (7)
------- -------
Increase (decrease) in cash and cash equivalents............ 14,381 (189)
------- -------
Cash and cash equivalents at beginning of period............ 3,382 830
------- -------
Cash and cash equivalents at end of period.................. $17,763 $ 641
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 69 $ 266
Income taxes........................................... $ 1,678 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-23
<PAGE> 70
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by management, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position of Complete Business Solutions, Inc. (the Company)
as of June 30, 1997, the results of its operations for the three- and six-month
periods ended June 30, 1997 and 1996, and cash flows for the six-month periods
ended June 30, 1997 and 1996. These financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Prospectus, dated August 20, 1997.
The results of operations for the three-month period ended June 30, 1997
are not necessarily indicative of the results to be expected in future quarters
or for the full fiscal year ending December 31, 1997.
2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the accompanying condensed consolidated
financial statements.
As of December 31, 1996, the Company owned 72% of CBS Complete Business
Solutions (Mauritius) Limited (CBS Mauritius) and an unrelated entity owned the
remaining 28%. CBS Mauritius owns 100% of Complete Business Solutions (India)
Private Limited (CBS India). As authorized in the CBS Mauritius Shareholders
Agreement and in connection with the initial public offering of the Company's
Common Stock, the 28% shareholder of CBS Mauritius converted its ownership
interest in CBS Mauritius into 552,632 shares of the Company's Common Stock. The
acquisition of the minority shares was accounted for under the purchase method
of accounting. The excess of the aggregate purchase price over the fair value of
the net assets acquired has been recognized as goodwill of approximately $2,931
in the condensed consolidated balance sheets. The impact of this transaction on
prior years was not significant, therefore pro forma information has not been
provided.
3. COMMON STOCK OFFERINGS
In March 1997, the Company completed an initial public offering of
2,500,000 shares of its Common Stock at a price of $12.00 per share. That
offering consisted of 2,300,000 shares of newly issued Common Stock and 200,000
shares sold by a selling shareholder. After underwriting discounts, commissions
and other issuance costs, net proceeds to the Company from that offering were
approximately $23,792. The net proceeds from that offering have been invested in
cash equivalents with an initial maturity of three months or less.
On August 20, 1997, the Company filed a Prospectus with the Securities and
Exchange Commission for the sale of an additional 2,600,000 shares of its Common
Stock. This secondary offering consists of 1,450,000 shares of newly issued
Common Stock and 1,150,000 shares sold by selling shareholders at the offering
price of $28 1/4. The net proceeds to the Company from this offering are
intended to be used for: expansion of existing operations, including the
Company's offshore software development operations; development of new service
lines and possible acquisitions of related businesses; and general corporate
purposes, including working capital.
F-24
<PAGE> 71
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Prior to March 4, 1997, the shareholders of the Company had elected, under
the provisions of Subchapter S of the United States Internal Revenue Code, to
have income and related tax benefits of the Company included in the taxable
income of the shareholders. As a result, no provision for U.S. federal or state
income taxes has been included in the condensed consolidated statements of
income prior to March 4, 1997.
On March 4, 1997, in connection with the initial public offering discussed
in Note 3, the shareholders and the Company revoked the Subchapter S election,
thereby subjecting future income of the Company to federal and state income
taxes at the corporate level. Accordingly, the application of the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," resulted in the recognition of deferred tax assets and liabilities, and
a corresponding charge to the provision for income taxes of approximately $920
during the six-month period ended June 30, 1997.
Subsequent to March 4, 1997, the Company has provided federal and state
income taxes in the condensed consolidated statements of income based on the
anticipated effective tax rate for fiscal year 1997. The unaudited pro forma net
income in the condensed consolidated statements of income reflect applicable
after pro forma adjustments to the provision for income taxes to reflect net
income as if the Subchapter S election had been revoked prior to January 1,
1996. The differences between the United States Federal statutory rate and the
consolidated effective rate for the six-month period ended June 30, 1997 are as
follows:
<TABLE>
<S> <C>
Statutory Federal income tax rate........................... 34.0%
Foreign earnings not subject to U.S. tax.................... (4.0)
Other....................................................... 1.6
-----
31.6%
S corporation termination................................... 20.0
S corporation earnings...................................... (7.7)
-----
Effective tax rate.......................................... 43.9%
=====
</TABLE>
CBS Mauritius is incorporated in Mauritius and is not subject to income
taxes. CBS India is an Indian corporation subject to income taxes and receives
exemptions from Indian income taxes under free trade zone and software exporters
provisions of Indian tax law. The Company considers all undistributed earnings
of its foreign subsidiaries to be permanently invested. Therefore, no United
States income taxes have been provided on these earnings.
5. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
was issued in February 1997. The Company will be required to adopt the new
standard for the year and the quarter ended December 31, 1997. Early adoption of
this standard is not permitted. The primary requirements of this standard are:
(i) replacement of primary earnings per share with basic earnings per share
which eliminates the dilutive effect of options and warrants; (ii) use of an
average share price in applying the treasury method to compute dilution for
options and warrants for diluted earnings per share; and (iii) disclosure
reconciling the
F-25
<PAGE> 72
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
numerator and denominator of earnings per share calculations. The effect of this
accounting change on pro forma net income per share is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------
1997 1996
<S> <C> <C>
Per share amounts --
Pro forma net income per common share as reported........... $0.35 $0.17
Effect of SFAS No. 128...................................... 0.01 0.03
----- -----
Pro forma basic net income per common share................. $0.36 $0.20
===== =====
Pro forma diluted net income per common share............... $0.35 $0.17
===== =====
</TABLE>
F-26
<PAGE> 73
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING
SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
The Company............................... 13
Use of Proceeds........................... 14
Price Range of Common Stock............... 14
Dividend Policy........................... 15
Capitalization............................ 15
Selected Financial Data................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 17
Business.................................. 23
Management................................ 33
Certain Transactions...................... 38
Principal and Selling Shareholders........ 40
Description of Capital Stock.............. 41
Shares Eligible for Future Sale........... 41
Underwriting.............................. 43
Legal Matters............................. 44
Experts................................... 44
Additional Information.................... 44
Glossary of Certain Technical Terms....... 45
Index to Financial Statements............. F-1
</TABLE>
======================================================
======================================================
2,600,000 SHARES
CBSI LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
UBS SECURITIES
LEGG MASON WOOD WALKER
INCORPORATED
AUGUST 20, 1997
======================================================
