<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1997
REGISTRATION NO. 333-18413
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
COMPLETE BUSINESS SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN
(State or Other Jurisdiction
of Incorporation or Organization)
7371
(Primary Standard Industrial
Classification Code Number)
38-2606945
(I.R.S. Employer
Identification No.)
32605 WEST TWELVE MILE ROAD
SUITE 250
FARMINGTON HILLS, MICHIGAN 48334
(810) 488-2088
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Executive Offices)
------------------------------
RAJENDRA B. VATTIKUTI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COMPLETE BUSINESS SOLUTIONS, INC.
32605 WEST TWELVE MILE ROAD
SUITE 250
FARMINGTON HILLS, MICHIGAN 48334
(810) 488-2088
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------------
With Copies to:
DANIEL I. DE WOLF, ESQ.
WILLIE E. DENNIS, ESQ.
Camhy Karlinsky & Stein LLP
1740 Broadway
New York, New York 10019
(212) 977-6600
DOUGLAS R. NEWKIRK, ESQ.
J. TODD ARKEBAUER, ESQ.
Sachnoff & Weaver, Ltd.
30 South Wacker Drive, 29th Floor
Chicago, Illinois 60606
(312) 207-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
MARCH 5, 1997
2,500,000 SHARES
CBSI LOGO
COMMON STOCK
Of the 2,500,000 shares of Common Stock offered hereby, 2,300,000 shares
are being sold by Complete Business Solutions, Inc. ("CBSI" or the "Company")
and 200,000 shares are being sold by the Selling Shareholder. See "Principal and
Selling Shareholders." The Company will not receive any part of the proceeds
from the sale of shares by the Selling Shareholder.
Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CBSL."
------------------------------
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>
<S> <C> <C> <C> <C>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
- ------------------------------------------------------------------------------------------------------------------
Per Share............... $12.00 $0.84 $11.16 $11.16
Total(3)................ $30,000,000 $2,100,000 $25,668,000 $2,232,000
</TABLE>
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses, estimated at $1,400,000, which will be paid by
the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 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, the total
Price to the Public, Underwriting Discounts and Commissions, Proceeds to the
Company and Proceeds to the Selling Shareholder will be $34,500,000,
$2,415,000, $29,853,000 and $2,232,000, respectively. 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 March 10, 1997.
DONALDSON, LUFKIN & JENRETTE FERRIS, BAKER WATTS
SECURITIES CORPORATION INCORPORATED
<PAGE> 3
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, 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."
------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------------------
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.
<PAGE> 4
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 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. All share and per share data in this Prospectus have been adjusted to
give retroactive effect to the conversion by JF Electra (Mauritius) Limited ("JF
Electra") of its shares of stock in CBS Complete Business Solutions (Mauritius)
Limited ("CBS Mauritius") into 552,632 shares of common stock of the Company, no
par value (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 solutions. CBSI offers
custom-tailored solutions based on an assessment of each client's needs. The
Company's services include: (i) large systems applications development and
maintenance; (ii) reengineering legacy applications to client/server technology;
(iii) client/server applications development; (iv) Year 2000 conversion
services; (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 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, Ford Motor
Company, IBM, ISSC/Foremost Insurance, 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 years 1994, 1995 and 1996, 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 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 either have no offshore capability or depend on
subcontractor relationships to offer such services. With its offsite and
offshore development options, the Company can quickly provide clients with IT
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 capabilities; (iv) develop new and expand recently added service offerings
such as Enterprise Resource Planning software package installation,
Internet/intranet applications and Electronic Data Interchange applications; (v)
increase its international presence; and (vi) pursue targeted acquisitions.
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<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......................... 2,300,000 shares
Common Stock offered by the Selling Shareholder............. 200,000 shares
Common Stock to be outstanding after the offering........... 9,300,000 shares(1)
Use of proceeds............................................. Payment of undistributed S corporation
earnings; repayment of existing debt;
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>
- -------------------------
(1) Excludes: (i) options outstanding on the date hereof to purchase 595,824
shares of Common Stock at a weighted average exercise price of $8.07 per
share; and (ii) 522,810 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> 6
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF INCOME DATA:
Revenues...................................... $32,382 $43,795 $56,358 $67,399 $83,241
Gross profit.................................. 7,159 10,290 13,522 13,790 19,939
Income from operations........................ 1,410 1,937 2,635 1,966 4,484
Interest expense.............................. 185 197 345 692 539
Provision for income taxes.................... -- -- -- -- 84
Minority interest............................. 36 127 176 252 158
Net income.................................... $ 1,189 $ 1,613 $ 2,114 $ 1,022 $ 3,703
PRO FORMA STATEMENT OF INCOME DATA:
Revenues............................................................................. $67,399 $83,241
Gross profit......................................................................... 13,790 19,939
Income from operations(1)............................................................ 1,811 4,329
Interest income(2)................................................................... (32) (71)
Provision for income taxes(3)........................................................ 389 1,580
Net income(4)........................................................................ $ 1,454 $ 2,820
Net income per common share.......................................................... $ 0.18 $ 0.34
Weighted average shares outstanding(5)............................................... 7,961 8,213
<CAPTION>
AS OF
DECEMBER 31, 1996
--------------------
AS
ACTUAL ADJUSTED(6)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 3,382 $12,459
Working capital...................................................................... 10,077 24,273
Total assets......................................................................... 31,258 43,425
Revolving credit facility and long-term debt......................................... 6,191 --
Minority interest.................................................................... 1,503 --
Total shareholders' equity........................................................... 13,951 32,706
</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.
(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 "Use of Proceeds."
(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 21.1% and 35.9% for the years ended December
31, 1995 and 1996, 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.
(5) Reflects pro forma weighted average shares of Common Stock, plus the
portion of the Common Stock offered hereby needed to generate proceeds
sufficient to repay the Company's revolving credit facility and
long-term debt at the end of each period. See "Use of Proceeds" and
"Capitalization."
(6) Adjusted to give effect to: (i) the recording of an estimated $1.1
million deferred tax liability upon termination of the Company's S
corporation status; (ii) the issuance of 552,632 shares of Common Stock
in connection with the conversion of JF Electra's minority interest in
CBS Mauritius, including the elimination of the minority interest; and
(iii) the sale of 2,300,000 shares of Common Stock by the Company and
the application of the estimated net proceeds therefrom as described in
"Use of Proceeds." See "S Corporation Distribution" and "Certain
Transactions."
5
<PAGE> 7
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, who possess the technical skills and experience necessary to deliver
the Company's services. Qualified IT professionals are in great 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 accomplished a significant portion of
its recruiting outside of the countries where the client 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 December 31, 1996, approximately 45% 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 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% and 6.9% of the Company's total revenues in
fiscal years 1994, 1995 and 1996, 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 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."
6
<PAGE> 8
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."
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 December 31, 1996, the Company had approximately 28% 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."
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 those fixed-price project engagements accepted by
the Company will be profitable, which could have a
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<PAGE> 9
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 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 59% and 49%
of revenues in fiscal years 1995 and 1996, respectively. International Business
Machines and its affiliates accounted for approximately 19% and 12% of the
Company's revenues in fiscal years 1995 and 1996, respectively. Revenues from
this client 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 1992 to $83.2 million in 1996, and the
number of employees has grown from 480 as of December 31, 1992 to 1,431 as of
December 31, 1996. The Company's continued growth depends on its ability to add
managers, to increase its international operations, to add service lines and to
expand further its offshore facilities. None of the Company's senior management
has managed a public 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."
In general, 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
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<PAGE> 10
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. Although Messrs. Vattikuti and Manney have entered
into employment agreements containing noncompetition covenants that extend for a
period of one year following termination of employment and nondisclosure
covenants, such agreements do not guarantee that Messrs. Vattikuti and Manney
will continue their employment with the Company nor 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 successfully could have a
material adverse effect on the Company's business, operating results and
financial condition. 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
9
<PAGE> 11
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."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock of the Company. The initial public offering price per share of the Common
Stock was determined by negotiations among management of the Company, the
Selling Shareholder and the Underwriters. There can be no assurance that an
active public market in the Common Stock will develop or be sustained. The
Nasdaq National Market has from time to time experienced extreme price and
volume fluctuations that have often been unrelated to the operating performance
of particular companies. In addition, factors such as announcements of
technological innovations, new products or services or new client engagements by
the Company or its competitors or third parties, as well as market conditions in
the IT industry, may have a significant impact on the market price of the Common
Stock. See "Underwriting."
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of this offering, Mr. Vattikuti will beneficially own
approximately 63.9% of the outstanding shares of Common Stock. As a result, Mr.
Vattikuti will be able to elect the entire Board of Directors, and will retain
the voting power to control all matters requiring shareholder approval,
including approval of significant corporate transactions. 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 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.
10
<PAGE> 12
ANTI-TAKEOVER PROVISIONS
The Company's Restated Articles of Incorporation, as amended (the
"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.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of this offering, the Company will have
9,300,000 shares of Common Stock outstanding, of which the 2,500,000 shares sold
pursuant to this offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except those shares acquired by affiliates of the Company.
The remaining shares will be "restricted securities" within the meaning of Rule
144 under the Securities Act. The Company has granted Messrs. Land, Manney and
Rankin certain demand and piggyback registration rights covering an aggregate of
639,389 shares of Common Stock. As of March 5, 1997, 595,824 shares of Common
Stock are issuable upon the exercise of outstanding stock options (4,952 of
which are currently exercisable), which shares may be registered by the Company
under the Securities Act and become freely tradeable without restriction. The
Company and all of its current shareholders, holding an aggregate of 6,800,000
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, until 180 days after the date of this Prospectus,
without the prior consent of Donaldson, Lufkin & Jenrette Securities
Corporation, on behalf of the Underwriters. Following the 180 day period,
6,433,107 of the restricted securities will become immediately eligible for
sale, subject to the manner of sale, volume, notice and information requirements
of Rule 144. 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."
BENEFITS OF OFFERING TO CURRENT SHAREHOLDERS
In addition to the Selling Shareholder receiving proceeds from this
offering, certain current shareholders will receive other material benefits in
connection with this offering including dedication of a portion of the proceeds
to the payment of certain federal taxes resulting from the Company's conversion
from an S corporation to a C corporation and payment of undistributed S
corporation earnings. This offering will establish a public market for the
Common Stock and provide significantly increased liquidity to current
shareholders for the shares of Common Stock they will own after this offering.
See "Use of Proceeds," "Dilution" and "Principal and Selling Shareholders."
11
<PAGE> 13
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share of Common Stock is
substantially higher than the net tangible book value per share of the Common
Stock. Purchasers of shares of Common Stock in this offering will experience
immediate and substantial dilution of $8.82 in the pro forma net tangible book
value per share of Common Stock. See "Dilution."
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. 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
A substantial portion of the anticipated net proceeds of this offering has
not 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."
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 (810) 488-2088.
Immediately prior to the effective date of this offering, the Company
became the sole shareholder of its subsidiary, CBS Mauritius, which in turn 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.
As a result of JF Electra's conversion of its shares in CBS Mauritius into
Common Stock, JF Electra owns 552,632 shares of Common Stock, representing
approximately 7.9% of the outstanding shares of Common Stock. CBS India provides
offshore software development services and recruiting and training services for
CBSI in India.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company (after deduction of estimated underwriting discounts and
commissions and offering expenses payable by the Company) are estimated to be
approximately $24.3 million. The Company expects to use the net proceeds from
this offering for: (i) payment of undistributed S corporation earnings,
estimated to be $9.0 million; (ii) repayment in full to NBD Bank (the "Bank") of
existing debt in the amount of $3.0 million, bearing interest at floating rates
based on such Bank's prime rate or a Eurodollar rate, the majority of which
matures on demand; (iii) expansion of existing operations, including the
Company's offshore software development operations, development of new service
lines and possible acquisitions of related businesses; and (iv) general
corporate purposes, including working capital. Although the Company actively
seeks the acquisition of 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. See "S Corporation Distribution,"
"Business -- CBSI Growth Strategies" and Notes 6 and 7 of Notes to Consolidated
Financial Statements. The principal purposes of this offering are to obtain
additional working capital, create a public market for the Common Stock, provide
liquidity to the Company's shareholders and facilitate future access by the
Company to public equity markets.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholder. See "Principal and Selling Shareholders."
S CORPORATION DISTRIBUTION
Since February 1, 1988, the Company has been a corporation subject to
income taxation under Subchapter S of the Internal Revenue Code of 1986, as
amended. As a result, substantially all of the Company's net income has been
attributed, for income tax purposes, directly to certain of the Company's
shareholders rather than to the Company. The Company's S corporation status
terminated in connection with the conversion by JF Electra of its shares in CBS
Mauritius into Common Stock and the Company will make a final distribution (the
"Distribution") to certain of its existing shareholders in an aggregate amount
representing substantially all of the S corporation's undistributed earnings
taxed or taxable to its shareholders through the closing of this offering. The
Distribution is estimated to be approximately $9.0 million. Purchasers of Common
Stock in this offering will not receive any portion of the Distribution.
Following termination of its S corporation status, the Company will be
subject to corporate income taxation under Subchapter C of the Internal Revenue
Code of 1986, as amended. In connection with the termination of its S
corporation status, the Company estimates that it will record, in the period in
which this offering occurs, a deferred tax liability and a corresponding income
tax expense of approximately $1.1 million. The deferred tax liability will be
paid within one year. The deferred tax liability will be recorded in accordance
with Statement of Financial Accounting Standards No. 109. See Note 1 of Notes to
Consolidated Financial Statements.
13
<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.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of December 31, 1996, and as adjusted to give effect to: (i) the
recording of an estimated $1.1 million deferred tax liability upon termination
of the Company's S corporation status (see "S Corporation Distribution"); (ii)
the issuance of 552,632 shares of Common Stock in connection with the conversion
of JF Electra's minority interest in CBS Mauritius, including the elimination of
the minority interest; and (iii) the sale of 2,300,000 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 as described in "Use of
Proceeds." The following table should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Revolving credit facility................................. $ 5,400 $ --
Current portion of long-term debt......................... 486 --
------- ---------
Total short-term debt................................ $ 5,886 $ --
======= =========
Long-term debt, less current portion........................ $ 305 $ --
Minority interest........................................... 1,503 --
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;
6,447,368 shares
issued and outstanding; 9,300,000 shares issued and
outstanding,
as adjusted(1)......................................... -- --
Additional paid-in capital................................ 3,226 35,030
Retained earnings......................................... 13,049 --
Stock subscriptions receivable............................ (2,125) (2,125)
Cumulative translation adjustment......................... (199) (199)
------- ---------
Total shareholders' equity........................... 13,951 32,706
------- ---------
Total capitalization............................ $15,759 $32,706
======= =========
</TABLE>
- -------------------------
(1) Excludes: (i) options outstanding on the date hereof to purchase 595,824
shares of Common Stock at a weighted average exercise price of $8.07 per
share; and (ii) 522,810 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."
14
<PAGE> 16
DILUTION
As of December 31, 1996, the Company's net tangible book value was
approximately $14.0 million or $2.17 per share. Net tangible book value per
share represents the Company's total tangible assets less the Company's total
liabilities, divided by the aggregate number of shares of Common Stock
outstanding. After giving effect to: (i) the recording of an estimated $1.1
million deferred tax liability upon termination of the Company's S corporation
status; (ii) the issuance of 552,632 shares of Common Stock in connection with
the conversion of JF Electra's minority interest in CBS Mauritius, including the
elimination of the minority interest; and (iii) the sale of 2,300,000 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 as described
in "Use of Proceeds," the pro forma net tangible book value of the Company at
December 31, 1996 would have been $29.6 million or $3.18 per share. This amount
represents an immediate increase in net tangible book value of $1.01 per share
to existing shareholders and an immediate dilution of $8.82 per share to
purchasers of Common Stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share of Common Stock..... $12.00
Net tangible book value per share at December 31, 1996.... $2.17
Increase in net tangible book value per share attributable
to new investors....................................... 1.01
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.18
------
Dilution in net tangible book value per share to new
investors................................................. $ 8.82
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996 and after giving effect to the conversion into Common Stock of JF Electra's
shares in CBS Mauritius, the differences in the number of shares of capital
stock purchased from the Company, the total consideration paid and the average
price paid per share by existing shareholders and new investors at the initial
public offering price of $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)................ 7,000,000 75.3% $ 6,126,000 18.2% $ 0.88
New investors(1)........................ 2,300,000 24.7 27,600,000 81.8 $12.00
--------- ----- ----------- -----
Total.............................. 9,300,000 100.0% $33,726,000 100.0%
======== ===== ========== =====
</TABLE>
- -------------------------
(1) Sales by the Selling Shareholder in this offering will reduce the number of
shares held by existing shareholders of the Company to 6,800,000 shares or
73.1% of the total number of shares outstanding after this offering (70.3%
if the Underwriters' over-allotment option is exercised in full) and will
increase the number of shares held by new investors to 2,500,000 shares or
26.9% of the total number of shares outstanding after this offering
(2,875,000 shares or 29.7% if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Shareholders."
15
<PAGE> 17
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 this offering and related
transactions. 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 Financial Statements and related Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF INCOME DATA:
Revenues.............................................. $32,382 $43,795 $56,358 $67,399 $83,241
Cost of revenues...................................... 25,223 33,505 42,836 53,609 63,302
-------- -------- -------- -------- --------
Gross profit.......................................... 7,159 10,290 13,522 13,790 19,939
Selling, general and administrative
expenses............................................ 5,749 8,353 10,887 11,824 15,455
-------- -------- -------- -------- --------
Income from operations................................ 1,410 1,937 2,635 1,966 4,484
Interest expense...................................... 185 197 345 692 539
-------- -------- -------- -------- --------
Income before provision for income taxes and minority
interest............................................ 1,225 1,740 2,290 1,274 3,945
Provision for income taxes............................ -- -- -- -- 84
Minority interest..................................... 36 127 176 252 158
-------- -------- -------- -------- --------
Net income............................................ $ 1,189 $ 1,613 $ 2,114 $ 1,022 $ 3,703
======== ======== ======== ======== ========
PRO FORMA STATEMENT OF INCOME DATA:
Revenues............................................................................... $67,399 $83,241
Gross profit........................................................................... 13,790 19,939
Income from operations(1).............................................................. 1,811 4,329
Interest income(2)..................................................................... (32) (71)
Provision for income taxes(3).......................................................... 389 1,580
Net income(4).......................................................................... $ 1,454 $ 2,820
Net income per common share............................................................ $ 0.18 $ 0.34
Weighted average shares outstanding(5)................................................. 7,961 8,213
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 66 $ 425 $ 319 $ 830 $ 3,382
Working capital....................................... 1,961 2,420 3,745 5,799 10,077
Total assets.......................................... 11,021 16,031 20,740 23,423 31,258
Revolving credit facility and long-term debt.......... 2,754 4,189 5,933 6,316 6,191
Minority interest..................................... 48 175 350 552 1,503
Total shareholders' equity............................ 4,598 6,211 8,325 9,188 13,951
</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.
(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 "Use of
Proceeds."
(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 tax
provision was computed as follows:
<TABLE>
<CAPTION>
YEARS 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>
(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.
(5) Reflects pro forma weighted average shares of Common Stock, plus the portion
of Common Stock offered hereby needed to generate proceeds sufficient to
repay the Company's revolving credit facility and long-term debt at the end
of each period. See "Use of Proceeds" and "Capitalization."
16
<PAGE> 18
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 years. The Company leverages its existing
client base by providing quality services and client responsiveness. For each of
the years 1994, 1995 and 1996, 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 provided through either client-managed or CBSI-managed projects. For the
year ended December 31, 1996, the percentage of professional service fees
generated from client-managed projects and CBSI-managed projects was
approximately 54% and 46%, respectively. Historically, the majority of the
Company's revenues have been generated from client-managed projects. On
client-managed projects, CBSI provides professional services as a member of the
project team working under the direct supervision of the client, typically on a
time-and-materials basis. The Company recognizes revenues on time-and-materials
projects as the services are performed. On CBSI-managed projects, the Company
assumes responsibility for project management and may bill the client on either
a time-and-materials or fixed-price basis, although such projects are primarily
billed on a time-and-materials basis. The Company recognizes fixed-price
revenues under the percentage of completion method. The Company is seeking to
shift a larger portion of its business to CBSI-managed projects which have
higher gross profit margin potential. For the year ended December 31, 1996, the
gross profit for CBSI-managed projects was approximately 27% and the gross
profit for client-managed projects was approximately 20%.
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 fiscal year 1996, CBSI's
operating income as a percentage of revenues overall was 5%, whereas operating
income as a percentage of revenues for work performed offshore in India was 20%.
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 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
substantial investments in infrastructure, including: (i) software development
centers in three locations in the U.S. and two locations in
17
<PAGE> 19
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>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995 1996
<S> <C> <C> <C> <C>
Revenues.................................................... 100% 100% 100% 100%
Cost of revenues............................................ 77 76 79 76
---- ---- ---- ----
Gross profit................................................ 23 24 21 24
Selling, general and administrative expenses................ 19 19 18 19
---- ---- ---- ----
Income from operations...................................... 4% 5% 3% 5%
</TABLE>
1996 COMPARED TO 1995
Revenues. The Company's revenues increased 23% to $83.2 million in 1996
from $67.4 million in 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 consists of revenues less cost of revenues. Cost
of revenues consists primarily of salaries (including nonbillable time),
benefits, travel and relocation for IT professionals. In addition, cost of
revenues includes the cost of software products sold, depreciation and
amortization and contractual services. Gross profit increased approximately 44%
to $19.9 million in 1996 from $13.8 million in 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 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 1995
results.
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 facilities costs. 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 1996 from 18% in 1995.
1995 COMPARED TO 1994
Revenues. The Company's revenues increased 20% to $67.4 million in 1995
from $56.4 million in 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 1995 from $2.6 million in 1994.
Gross Profit. Gross profit increased 2% to $13.8 million in 1995 from $13.5
million in 1994, despite the impact of the Fixed-Price Project on 1995 results.
Gross profit represented 21% of total revenues in 1995 as
18
<PAGE> 20
compared to 24% in 1994. Excluding the excess costs associated with the
Fixed-Price Project, gross profit margins would have remained constant from 1994
to 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8% to $11.8 million in 1995 from $10.9 million
in 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 1995 from 19% in
1994.
1994 COMPARED TO 1993
Revenues. The Company's revenues increased 29% to $56.4 million in 1994
from $43.8 million in 1993. This growth in revenues is primarily due to the
addition of four major projects which amounted to $7.6 million and included a
Year 2000 conversion for an automotive manufacturer, additional services
provided to existing clients and the expansion of the Company's client base to
187 as of December 31, 1994 from 152 as of December 31, 1993. Revenues from
existing clients in 1994 increased $11.0 million over revenues from those
clients during 1993. Revenues from the Company's international operations
increased 100% to $2.6 million in 1994 from $1.3 million in 1993.
Gross Profit. Gross profit increased 31% to $13.5 million in 1994 from
$10.3 million in 1993. Gross profit increased to 24% of total revenues in 1994
as compared to 23% in 1993. This increase is associated with higher gross profit
margins resulting from the Company's shift to offshore projects in India.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 30% to $10.9 million in 1994 from $8.4 million
in 1993. As a percentage of revenues, selling, general and administrative
expenses represented 19% in both 1994 and 1993.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters ending with the quarter ended
December 31, 1996. 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 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
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $16,959 $17,050 $16,487 $16,903 $19,128 $20,420 $21,951 $21,742
Cost of revenues.............. 12,746 13,882 13,245 13,736 14,284 15,518 16,737 16,763
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................. 4,213 3,168 3,242 3,167 4,844 4,902 5,214 4,979
Selling, general and
administrative expenses..... 3,087 3,063 2,928 2,746 3,613 3,618 3,855 4,369
------- ------- ------- ------- ------- ------- ------- -------
Income from operations........ 1,126 105 314 421 1,231 1,284 1,359 610
Interest expense.............. 140 192 205 155 141 159 146 93
Provision for income taxes.... -- -- -- -- 17 19 24 24
Minority interest............. 212 (86) (6) 132 35 78 67 (22)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............. $ 774 $ (1) $ 115 $ 134 $ 1,038 $ 1,028 $ 1,122 $ 515
======= ======= ======= ======= ======= ======= ======= =======
Pro forma incremental income
tax provision............... 102 -- 15 18 358 353 383 166
------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income (loss)... $ 672 $ (1) $ 100 $ 116 $ 680 $ 675 $ 739 $ 349
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
From the Company's inception in 1985 through December 31, 1996, the Company
generally financed its 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 and $4.5 million for the years ended December 31,
1994, 1995 and 1996, respectively.
The principal use of cash for investing activities during the three years
ended December 31, 1996 was for the purchase of equipment, software and property
as part of the creation and enhancement of the Company's software development
centers. As of December 31, 1996, the net book value of investments in
equipment, software and property total $2.3 million in India, $1.7 million for
existing projects and $0.4 million for the client/server labs. Included in the
net $2.3 million investment in India is approximately $1.2 million of recent
investments in the Bangalore and Hyderabad facilities.
Borrowings under the revolving credit facility represented the most
significant component of cash provided by financing activities. Under an
arrangement with the Bank, the Company may borrow an amount not to exceed the
lesser of $16.0 million or 80% of trade accounts receivable less than 90 days
outstanding, with interest at the Bank's prime interest rate or a Eurodollar
rate. At December 31, 1996, the permitted borrowings under this facility were
$15.2 million. The borrowings under this facility are short-term, payable on
demand and are secured by trade accounts receivable of the Company. As of
December 31, 1996, $5.4 million was outstanding under this revolving credit
facility (the "facility"). A portion of the proceeds of this offering will be
used to repay the amount outstanding under the facility. The Company also has a
working capital facility (the "Second facility") aggregating $3.0 million with
the Bank with interest at the Bank's prime interest rate. The borrowings under
the Second facility are short-term, payable on demand and are secured by all
assets of the Company. There have been no borrowings under the Second facility.
In addition, the Company has an equipment line of credit (the "Third facility")
aggregating $2.0 million with the Bank with interest at the Bank's prime
interest rate. The borrowings under the Third facility are short term, payable
on demand and are secured by all assets of the Company. There have been no
borrowings under the Third facility. In recent years, the Company has executed
several term notes with the Bank to finance the purchase of equipment and
software. As of December 31, 1996, approximately $0.8 million was outstanding
under the notes which was repaid in January 1997.
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 accounted for 4.7%, 6.8% and
6.9% of the Company's total revenues in fiscal years 1994, 1995 and 1996,
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 1994, 1995 and 1996 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 1994, 1995 and 1996.
20
<PAGE> 22
The Company currently anticipates that the proceeds from this offering,
together with existing sources of liquidity and cash generated from operations,
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. 123, "Accounting for Stock
Based Compensation" was issued in October 1995. The Company adopted the new
standard for the year ended December 31, 1996. This standard establishes the
fair value based method (the "SFAS 123 Method") rather than the intrinsic value
based method as the preferred accounting methodology for stock based
compensation arrangements. Entities are allowed to: (i) continue to use the
intrinsic value based methodology in their basic financial statements and
provide in the footnotes pro forma net income and earnings per share information
as if the SFAS 123 Method had been adopted; or (ii) adopt the SFAS 123 Method.
The Company adopted this statement by providing the required pro forma
disclosures in the footnotes. See Note 10 of Notes to Consolidated Financial
Statements.
21
<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 solutions. CBSI offers custom-tailored solutions based on an
assessment of each client's needs. The Company's services include: (i) large
systems applications development and maintenance; (ii) reengineering legacy
applications to client/server technology; (iii) client/server applications
development; (iv) Year 2000 conversion services; (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 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, Ford Motor
Company, IBM, ISSC/Foremost Insurance, 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 years 1994, 1995 and 1996, 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 years. As the Company has grown,
the Company has aggressively marketed CBSI-managed projects, which generally are
more profitable than client-managed projects, and the percentage of revenues
generated from CBSI-managed projects has increased each year since 1994.
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 either have no offshore capability or depend on
subcontractor relationships to offer such services. With its offsite and
offshore development options, the Company can quickly provide clients with IT
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 capabilities; (iv) develop new and expand recently added service offerings
such as Enterprise Resource Planning ("ERP") software package installation,
Internet/intranet applications and Electronic Data Interchange ("EDI")
applications; (v) increase its international presence; and (vi) 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.
22
<PAGE> 24
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 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 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 along the IT continuum, from development,
reengineering and maintenance of legacy 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 and network and communications technologies.
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 or depend on subcontractor
23
<PAGE> 25
relationships 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 410 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.
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. This methodology helps assure a quality
conversion process and addresses application portfolio analysis, impact
assessment, strategic planning, conversion, testing and implementation. 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. CBSI has already successfully completed all phases of Year 2000
projects for a division of Chrysler Corporation and for ISSC/Foremost Insurance
and is currently working on eleven additional Year 2000 projects.
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 its clients' needs along the IT continuum
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 years 1994, 1995 and 1996, 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 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's strategy is to leverage its knowledge of
clients' IT systems obtained during Year 2000 projects into additional
engagements involving other services, including maintenance of existing systems
and reenginering to client/server technology.
Capitalize on Significant Investments in Infrastructure and
Capabilities. The Company has made significant investments in its offsite and
offshore infrastructures as well as its systems, methodologies and training
programs. 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 communication links. The Company
believes that these investments can support a larger organization.
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, Year 2000 and implementation of ERP software packages such as
24
<PAGE> 26
ORACLE, PEOPLESOFT and SAP. The Company anticipates that its broad and expanding
range of services will minimize its dependence on any single technology.
Increase International Presence. 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% and 6.9% of the Company's total revenues in fiscal years 1994,
1995 and 1996, respectively. The Company plans to enhance its international
presence by expanding existing sales forces based in India and the U.K. and
opening new sales offices in Singapore and Continental Europe. The Company
believes that these regions represent significant potential markets for the
Company's services.
Pursue Targeted Acquisitions. CBSI 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 sales 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.
25
<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>
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
- -----------------------------------------------------------------------------------------------------------------
Reengineer Legacy Applications to Client/Server - Reengineer from centralized, mainframe-based
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, Access databases; Visual
Basic, Powerbuilder, C++ as graphical user
interfaces; and UNIX, OS/2 and Windows NT
operating systems
- -----------------------------------------------------------------------------------------------------------------
Year 2000 Conversion 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
- -----------------------------------------------------------------------------------------------------------------
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 CBSI-managed 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
26
<PAGE> 28
methodologies. A methodology used by the Company is METHOD/1, which the Company
licenses from Andersen Consulting. 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 focuses 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, International Business Machines and its
affiliates ("IBM"), accounted for 29%, 19% and 12% of the Company's total
revenues for the years ended December 31, 1994, 1995 and 1996, 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 period. 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.
27
<PAGE> 29
Organizations to which the Company provided services in 1996 include:
<TABLE>
<CAPTION>
YEAR OF
FIRST
CLIENT ENGAGEMENT
<S> <C>
Manufacturing:
Chrysler Corporation......... 1985
Ford Motor................... 1989
Johnson Controls............. 1994
Retail Distribution:
Spartan Stores............... 1992
The Gap...................... 1993
Handleman Company............ 1995
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
Insurance:
UNUM Ltd. ................... 1995
ISSC/Foremost Insurance...... 1996
Technology:
Tandem Computers............. 1989
IBM Corporation.............. 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 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 tool have already been
delivered, and the Company is currently developing an enhanced version. 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.
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<PAGE> 30
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 graphical user interface ("GUI") and C
as the development language. Using a combination of onsite and offshore
project teams, the Company is responsible for requirements analysis, as
well as for designing, coding, testing and implementing systems.
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)
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 30 IT
professionals, which is expected to grow to 60 IT professionals once the
Year 2000 conversion commences. 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 will include systems running under DB2, ADABAS,
NATURAL and COBOL.
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.
Following this offering, the Company intends to increase the use of employee
stock options as part of its recruitment and retention strategy.
The Company has 28 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 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 120
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 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
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<PAGE> 31
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.
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; and (v) employee stock
options.
CBSI's IT professionals typically have Bachelor's or Master's degrees in
Computer Science or another technical discipline. As of December 31, 1996, the
Company had 1,431 employees comprised of 1,272 IT professionals, 27 sales and
marketing personnel and 132 general and administrative personnel. As of December
31, 1996, the Company also had 75 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 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 intellectual property
adequately and could have a material adverse impact on the Company's business.
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.
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<PAGE> 32
FACILITIES
The Company leases approximately 42,000 square feet of office space in
Farmington Hills, Michigan which serves as its headquarters. The Company's
senior management, administrative personnel, human resources and sales and
marketing functions are housed in this facility. 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 expired on January 13, 1997. The
Company intends to execute a new lease for a term of five years with an option
to renew at the end of such term. The Company owns a facility totaling
approximately 6,375 square feet in Bangalore, India. The Company also leases
facilities in the United Kingdom and Bangalore and Hyderabad, India.
The Company believes that these facilities are adequate for its anticipated
future needs.
LITIGATION
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
$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.
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.
31
<PAGE> 33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors and their respective ages
and positions as of March 5, 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
Nanjappa S. Venugopal............. 44 Director of Human Resources
Douglas S. Land................... 39 Director
Frank D. Stella................... 77 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 a 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.
Douglas S. Land has served as a Director since November 1993 and an advisor
to the Company since 1988. Mr. Land is the founder and President of Economic
Analysis Group, Ltd., a Washington D.C.-based 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.
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<PAGE> 34
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.
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 four members. Upon
completion of this offering, the Board of Directors will be increased from four
to seven 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 an initial one-year term. The three vacancies
for the Class III Directors will be filled by appointment by the current Board
of Directors and the appointees will serve an initial two-year term. At each
annual meeting of shareholders after this offering, 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 Douglas Land. 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.
A total of 1,623,727 shares of Common Stock are authorized for issuance
pursuant to the 1996 Plan. As of March 5, 1997, options to purchase 595,824
shares were outstanding, and 522,810 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 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 1996). 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 agreement with Rajendra B.
Vattikuti that will become effective concurrently with this offering, which
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
which 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
five 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
Pursuant to an Agreement (the "Acquisition Agreement") among the Company,
JF Electra, CBS Mauritius and Rajendra 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 Padmaja Vattikuti, Rajendra
Vattikuti's wife, 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. As of March 5, 1997, JF Electra has converted all of its CBS Mauritius
shares into Common Stock and will sell a portion of such shares in this
offering. As a result of this conversion, the Shareholders Agreement has
terminated. See "Principal and Selling Shareholders."
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 are short-term, payable on demand and non-interest bearing. The
loans were repaid in February 1997.
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.
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.
In 1994, 1995 and 1996, Douglas Land and certain entities affiliated with
Mr. Land, earned collectively approximately $226,000, $96,000, and $244,000,
respectively, for serving as a Director and providing consulting services to the
Company. In addition, an entity affiliated with Mr. Land earned $160,000 for
services rendered in connection with this offering.
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 and $216,000 in 1996.
37
<PAGE> 39
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 5, 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 84.9% -- 5,942,275 63.9%
JF Electra (Mauritius) Limited(3).............. 552,632 7.9% 200,000 352,632 3.8%
Timothy S. Manney.............................. 267,402 3.8% -- 267,402 2.9%
Douglas S. Land(4)............................. 223,430 3.2% -- 223,430 2.4%
Daniel S. Rankin(5)............................ 74,279 1.0% -- 74,279 *
Frank D. Stella(6)............................. 4,952 * -- 4,952 *
Nanjappa S. Venugopal.......................... -- -- -- -- --
Roy Ely........................................ -- -- -- -- --
Jennifer Grey.................................. -- -- -- -- --
All directors and executive officers as a group
(8 persons).................................. 6,512,338 92.0% -- 6,512,338 69.4%
</TABLE>
- -------------------------
* Less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 375,000 shares of Common Stock from the Company.
(2) The address of Mr. Vattikuti is c/o Complete Business Solutions, Inc., 32605
West Twelve Mile Road, Suite #250, Farmington Hills, Michigan 48334.
(3) The address of JF Electra is 4/F Les Cascades Building, Edith Cavell Street,
Port Louis, Mauritius. Represents shares to be received by JF Electra upon
conversion of its shares of stock in CBS Mauritius into shares of Common
Stock of the Company.
(4) Does not include 14,261 shares transferred to certain family members. Mr.
Land disclaims beneficial ownership of such shares.
(5) Consists of 74,279 shares subject to options which are exercisable beginning
on April 24, 1997.
(6) Consists of 4,952 shares subject to currently exercisable options.
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. 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 (the
"Bylaws"), 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 7,000,000 shares of Common Stock and no shares of
Preferred Stock. Upon completion of this offering, the Company will have
9,300,000 outstanding shares of Common Stock and no outstanding shares of
Preferred Stock. As of March 5, 1997, there were four record holders of Common
Stock.
38
<PAGE> 40
COMMON STOCK
The Company's authorized common stock consists of 30,000,000 shares of
Common Stock. 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 9,300,000 shares of
Common Stock outstanding. See "Capitalization." Of these shares, the 2,500,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
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 shares of Common Stock are
restricted securities (the "Restricted Shares") within the meaning of Rule 144
("Rule 144") under the Securities Act, and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption offered by Rule 144.
The Company's current shareholders have agreed not to sell or otherwise
dispose of any of their shares of Common Stock for a period of 180 days after
the effective date of this offering (the "Lock-Up Period") without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
Because of these restrictions, on the date of this Prospectus, none of the
shares, other than the 2,500,000 shares offered hereby, will be eligible for
sale. Beginning after the expiration of the Lock-Up Period (or earlier upon the
prior written consent of DLJ), 6,433,107 of the Restricted Shares may be sold in
the public market subject to Rule 144.
In general, under Rule 144 of the Securities Act, beginning 90 days after
this offering, one (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, may 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 of the Company (93,000 shares after
giving effect to this offering) or the average weekly trading volume of the
Common Stock as reported through the Nasdaq National Market during the four
calendar weeks preceding such sale. Sales under Rule 144 of the Securities Act
are subject to certain restrictions relating to manner of sale, notice and the
availability of current public information about the Company. In addition,
39
<PAGE> 41
under Rule 144(k) of the Securities Act, 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 immediately
following this offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. In both cases, a holder of Rule 701 shares is required to wait until
90 days after the date of this Prospectus before selling such shares.
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 beginning six months
after the completion of this offering, 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, approximately 180 days after closing of this offering, to
register an aggregate of 1,118,634 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 March 5, 1997, options to purchase 595,824 shares of Common Stock were
outstanding and 522,810 shares of Common Stock remained available for future
grant under the 1996 Plan.
Prior to this offering there has been no market for the Common Stock of the
Company. 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."
40
<PAGE> 42
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and Ferris, Baker Watts, Incorporated
are acting as representatives (collectively, the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholder, and
the Company and the Selling Shareholder have agreed severally to sell to each of
the Underwriters, the number of shares of Common Stock (the "Shares") set forth
opposite their respective names at the initial public offering price per share
less the underwriting discounts and commissions set forth on the cover of this
Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,472,000
Ferris, Baker Watts, Incorporated........................... 368,000
ABN AMRO Chicago Corporation................................ 30,000
Bear Stearns & Co. Inc. .................................... 30,000
Alex. Brown & Sons Incorporated ............................ 30,000
Cowen & Company............................................. 30,000
First of Michigan Corporation............................... 30,000
Furman Selz LLC............................................. 30,000
Goldman, Sachs & Co. ....................................... 30,000
Hambrecht & Quist LLC....................................... 30,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated ......... 30,000
Montgomery Securities....................................... 30,000
J.P. Morgan Securities Inc. ................................ 30,000
Morgan Stanley & Co., Incorporated ......................... 30,000
Oppenheimer & Co., Inc. .................................... 30,000
Robertson, Stephens & Company LLC........................... 30,000
Smith Barney Inc. .......................................... 30,000
Adams Harkness & Hill, Inc. ................................ 15,000
William Blair & Co., L.L.C. ................................ 15,000
Dain Bosworth Inc. ......................................... 15,000
Johnston, Lemon & Co. Incorporated ......................... 15,000
McDonald & Company Securities, Inc. ........................ 15,000
Needham & Company, Inc. .................................... 15,000
Pennsylvania Merchant Group Ltd. ........................... 15,000
Roney & Co., L.L.C. ........................................ 15,000
Ryan, Beck & Co. ........................................... 15,000
Sands Brothers & Co., Ltd. ................................. 15,000
Stephens Inc. .............................................. 15,000
Unterberg Harris............................................ 15,000
Van Kasper & Company........................................ 15,000
Wheat First Butcher Singer Securities, Inc. ................ 15,000
--------
Total.................................................. 2,500,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the Shares are subject to approval of certain legal
matters by their counsel and to certain other conditions. If any of the Shares
are purchased by the Underwriters pursuant to the Underwriting Agreement, the
Underwriters are obligated to purchase all Shares (other than those covered by
the over-allotment option described below).
The Company and the Selling Shareholder have been advised by the
Underwriters that they propose to offer the Shares to the public initially at
the price to the public set forth on the cover page of this Prospectus and to
certain dealers at such price, less a concession not in excess of $0.50 per
Share. The Underwriters may
41
<PAGE> 43
allow, and such dealers may re-allow, a concession not in excess of $0.10 per
Share to certain other dealers. After this offering, the offering price and
other selling terms may be changed by the Underwriters.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable not later than 30 calendar days from the
date of the Underwriting Agreement, to purchase up to an aggregate of 375,000
additional shares at the initial offering price set forth on the cover page of
this Prospectus, less the underwriting discounts and commissions, solely to
cover over-allotments.
To the extent that the Underwriters exercise such option, each of the
Underwriters will have a commitment to purchase approximately the same
percentage of the option shares as the number of Shares to be purchased by it
shown in the above table bears to the total number of Shares shown in the above
table, and the Company will be obligated, pursuant to the option, to sell such
Shares to the Underwriters. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of the Shares. If
purchased, the Underwriters will sell such additional 375,000 shares on the same
terms as those on which the Shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholder against certain civil
liabilities, including liabilities under the Securities Act.
The Company and all of its current shareholders have agreed that during the
Lock-Up Period they will not, without the prior written consent of DLJ, on
behalf of the Underwriters, sell, offer to sell, contract to sell, grant any
option to purchase or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
other than the Shares, except that the Company may grant options under its 1996
Plan, provided that, without the prior written consent of DLJ, such options
shall not be exercisable during such period.
The Representatives have informed the Company and the Selling Shareholder
that the Underwriters do not intend to confirm sales to any discretionary
accounts without prior specific written approval of the customer.
An entity affiliated with Douglas Land, a shareholder and director of the
Company, earned $160,000 for services rendered in connection with this offering.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price was negotiated among the
Company, the Selling Shareholder and the Underwriters. Among the factors
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, were the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuations of companies in related
businesses.
In connection with this offering, the 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 Camhy Karlinsky & Stein LLP, New York, New York. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Sachnoff & Weaver, Ltd., Chicago, Illinois.
42
<PAGE> 44
EXPERTS
The Consolidated Financial Statements 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 has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement, of which the
Prospectus constitutes a part, on Form S-1 under the Securities Act with respect
to the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference to such exhibit.
The Registration Statement, including exhibits and schedules thereto, may
be inspected without charge at the Commission's principal office in Washington,
D.C., public reference facilities maintained by the Commission in Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices
of the Commission: Seven World Trade Center, Room 1400, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street N.W., Washington, D.C.
20549, Room 1024, at prescribed rates. The Registration Statement, including the
exhibits and schedules thereto, is also available at the Commission's web site
at www.sec.gov. Copies of reports, proxy and information statements and other
information regarding the Company will be available at 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.
43
<PAGE> 45
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.
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.
44
<PAGE> 46
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
</TABLE>
F-1
<PAGE> 47
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> 48
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- PRO FORMA
DECEMBER 31,
1995 1996 1996 (NOTE 14)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 830 $ 3,382 $ 3,382
Accounts receivable, net........................... 16,759 19,114 19,114
Unbilled revenues.................................. 534 1,627 1,627
Prepaid expenses and other......................... 531 1,136 1,136
------- ------- --------
Total current assets.......................... 18,654 25,259 25,259
------- ------- --------
Property and equipment, net............................. 3,571 5,167 5,167
Computer software, net.................................. 992 639 639
Other assets............................................ 206 193 193
------- ------- --------
Total assets.................................. $23,423 $31,258 $31,258
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 1,562 $ 2,304 $ 2,304
Accrued payroll and related costs.................. 3,895 4,907 4,907
Revolving credit facility.......................... 5,350 5,400 14,400
Other accrued liabilities.......................... 549 961 961
Deferred taxes..................................... -- -- 767
Current portion of deferred revenue................ 1,062 1,124 1,124
Current portion of long-term debt.................. 437 486 486
------- ------- --------
Total current liabilities..................... 12,855 15,182 24,949
------- ------- --------
Deferred revenue, less current portion.................. 299 317 317
Long-term debt, less current portion.................... 529 305 305
Deferred taxes.......................................... -- -- 339
Minority interest....................................... 552 1,503 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 6,169
Retained earnings.................................. 9,346 13,049 --
Stock subscriptions receivable..................... -- (2,125) (2,125)
Cumulative translation adjustment.................. (159) (199) (199)
------- ------- --------
Total shareholders' equity.................... 9,188 13,951 3,845
------- ------- --------
Total liabilities and shareholders' equity.... $23,423 $31,258 $31,258
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 49
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> 50
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> 51
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> 52
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 12 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> 53
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
F-8
<PAGE> 54
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
economic life of the product, generally three years. The establishment of
technological feasibility and the 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
F-9
<PAGE> 55
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $4,982. As a result of certain tax elections made by the Company,
approximately $3,876 of this 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> 56
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.
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> 57
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> 58
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> 59
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> 60
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
F-15
<PAGE> 61
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
Pro Forma Balance Sheet
Due to the anticipated termination of the Company's S corporation status,
the accompanying pro forma consolidated balance sheet as of December 31, 1996
reflects the distribution to the Company's shareholders of $9,000 through
additional borrowings under the revolving credit facility, along with the
recording of deferred tax liabilities. The pro forma consolidated balance sheet
also reflects the reclassification of undistributed earnings in the Company to
additional paid-in capital.
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
F-16
<PAGE> 62
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
(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
F-17
<PAGE> 63
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.............................................. -- 3,090 3,090
Other assets.......................................... 193 -- 193
------- --------- --------
Total assets................................... $31,258 $ 12,167 $43,425
======= ========= ========
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 31,804 35,030
Retained earnings................................... 13,049 (13,049) --
Stock subscriptions receivable...................... (2,125) -- (2,125)
Cumulative translation adjustment................... (199) -- (199)
------- --------- --------
Total shareholders' equity..................... 13,951 18,755 32,706
------- --------- --------
Total liabilities and shareholders' equity..... $31,258 $ 12,167 $43,425
======= ========= ========
</TABLE>
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> 64
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 offered hereby 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............................ -- 155 155
------- --------- ---------
Income from operations............................ 1,966 (155) 1,811
Interest expense (income)........................... 692 (724) (32)
------- --------- ---------
Income before provision for income taxes and
minority interest.............................. 1,274 569 1,843
Provision for income taxes.......................... -- 389 389
Minority interest................................... 252 (252) --
------- --------- ---------
Net income........................................ $ 1,022 $ 432 $ 1,454
======= ========= =========
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............................ -- 155 155
------- --------- ---------
Income from operations............................ 4,484 (155) 4,329
Interest expense (income)........................... 539 (610) (71)
------- --------- ---------
Income before provision for income taxes and
minority interest.............................. 3,945 455 4,400
Provision for income taxes.......................... 84 1,496 1,580
Minority interest................................... 158 (158) --
------- --------- ---------
Net income........................................ $ 3,703 $(883) $ 2,820
======= ========= =========
Pro forma net income per share...................... $ .34
=========
Pro forma weighted average shares outstanding....... 8,213,000
=========
</TABLE>
F-19
<PAGE> 65
IBC
[PHOTO] [PHOTO]
64KB High Speed Client Site/CBSI Team
Data Lines
FLEXIBLE
GLOBAL DELIVERY
CAPABILITY
[PHOTO] [PHOTO]
CBSI Offsite Team CBSI
Offshore
Team
<PAGE> 66
======================================================
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 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............................... 12
Use of Proceeds........................... 13
S Corporation Distribution................ 13
Dividend Policy........................... 14
Capitalization............................ 14
Dilution.................................. 15
Selected Financial Data................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 17
Business.................................. 22
Management................................ 32
Certain Transactions...................... 37
Principal and Selling Shareholders........ 38
Description of Capital Stock.............. 38
Shares Eligible for Future Sale........... 39
Underwriting.............................. 41
Legal Matters............................. 42
Experts................................... 43
Additional Information.................... 43
Glossary of Certain Technical Terms....... 43
Index to Financial Statements............. F-1
</TABLE>
------------------------
UNTIL MARCH 30, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,500,000 SHARES
CBSI LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FERRIS, BAKER WATTS
INCORPORATED
MARCH 5, 1997
======================================================
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses to be incurred in connection with the offering are
as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 19,341
National Association of Securities Dealers, Inc. fee........ 6,882
Nasdaq National Market listing fee.......................... 42,500
Printing expenses and other................................. 260,000
Legal fees and expenses..................................... 275,000
Blue sky fees and expenses.................................. 6,000
Accountants' fees and expenses.............................. 250,000
Miscellaneous............................................... 140,277
Insurance................................................... 400,000
---------
Total.................................................. $1,400,000
=========
</TABLE>
- -------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws require the Company to indemnify any director,
officer, former director or officer of the Company or any person who may have
served at the request of the Company as a director or officer of another
corporation in which the Company owns shares of capital stock, or of which it is
a creditor, against reasonable expenses (including attorneys' fees) actually and
necessarily incurred by such person in connection with the defense of any civil,
criminal or administrative action, suit or proceeding in which such person is
made a party or with which such person is threatened by reason of being or
having been or because of any act as a director or officer of the Company within
the course of such person's duties or employment, except in relation to matters
as to which such person is adjudged to be liable for negligence or misconduct in
the performance of such person's duties. The Company may also reimburse any
director or officer for the reasonable costs of settlement of any such action,
suit or proceeding, if it is found by a majority of a committee composed of the
directors not involved in the matter in controversy (whether or not a quorum)
that it was in the interests of the Company that such settlement be made and
that the director or officer was not guilty of negligence or misconduct. The
right of indemnification will extend to the estate, personal representative,
guardian and conservator of any deceased or former director or officer or person
who would have been entitled to indemnification. Such rights of indemnification
and reimbursement will not be deemed exclusive of any other rights to which such
director or officer may be entitled under any statute, agreement, vote of
shareholders, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act:
In September 1996, the Company effected a 10,000 for 1 stock split. In
February 1997, the Company filed an amendment to its Articles of Incorporation
to effect a .5942275 for 1 reverse stock split. All share numbers in this
Registration Statement have been retroactively restated to give effect to these
transactions.
On October 27, 1995, the Company granted non-incentive stock options
representing an aggregate of 267,402 shares of Common Stock to Timothy Manney.
The options were exercisable on the first anniversary from the date of the grant
at the purchase price of $4.21 per share. On December 30, 1996, Mr. Manney
exercised such 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.
II-1
<PAGE> 68
On October 27, 1995, the Company granted non-incentive stock options
representing an aggregate of 237,691 shares of Common Stock to Douglas Land. The
options were exercisable on the first anniversary from the date of the grant at
the purchase price of $4.21 per share. On December 30, 1996, Mr. Land exercised
such 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.
On October 27, 1995, the Company granted non-incentive stock options
representing an aggregate of 148,557 shares of Common Stock to Daniel Rankin.
The options are exercisable in two equal annual installments, commencing April
26, 1997, at an exercise price of $4.21.
On October 27, 1995, the Company granted non-incentive stock options
representing an aggregate of 14,856 shares of Common Stock to Frank Stella. The
options are exercisable on the first three anniversaries of the date of the
grant, at an exercise price of $4.21. On September 12, 1996, the Company granted
non-incentive stock options representing an aggregate of 8,913 shares of Common
Stock to Mr. Stella. The options are exercisable on the first three
anniversaries of the date of the grant, at an exercise price of $8.41.
On September 12, 1996, the Company also granted non-incentive stock options
representing an aggregate of 14,856 shares to Sreedhar Kajeepeta. The options
are exercisable in four equal annual installments, commencing one year from the
date of the grant, at an exercise price of $8.41.
On September 12, 1996, the Company also granted incentive stock options
representing an aggregate of 273,642 shares to various employees of the Company.
All the options are exercisable in either three or four annual installments,
commencing one year from the date of the grant, at an exercise price of $8.41.
On March 3, 1997, the Company also granted incentive stock options
representing an aggregate of 135,000 shares to various employees of the Company.
All the options are exercisable in no less than three equal annual installments,
commencing one year from the date of grant at an exercise price to $12.00.
Pursuant to an Agreement (the "Acquisition Agreement") among the Company,
JF Electra (Mauritius) Limited ("JF Electra"), CBS Complete Business Solutions
(Mauritius) Limited ("CBS Mauritius") and Rajendra Vattikuti, on July 19, 1996,
JF Electra acquired a 28% interest in CBS Mauritius.
On March 4, 1997, JF Electra exchanged its 28% interest in CBS Mauritius
into 552,632 shares of Common Stock.
The sales and issuances of the shares of the Common Stock discussed above
were exempt from registration by virtue of Sections 3(a), 3(b) and 4(2) of the
Securities Act.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Restated Articles of Incorporation of the Company, as
amended.
3.2* Bylaws of the Company.
4.1* See Exhibits 3.1 and 3.2 for provisions of the Restated
Articles of Incorporation and Restated Bylaws of the Company
defining rights of the holders of Common Stock of the
Company.
4.2* Specimen Stock Certificate.
5.1* Opinion of Camhy Karlinsky & Stein LLP, counsel to the
Company, as to the legality of the shares being registered.
10.1* Employment Agreement dated December 12, 1996 between the
Company and Rajendra B. Vattikuti.
10.2* Employment Agreement dated December 12, 1996 between the
Company and Timothy S. Manney.
</TABLE>
II-2
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
10.3* Lease dated October 22, 1992 and its seven amendments dated
October 1, 1993, June 14, 1994, June 28, 1994, September 30,
1994, October 14, 1994, August 10, 1995 and August 6, 1996,
between the Company and Orchard Ridge Office Park Limited
Partnership.
10.4* Lease Agreement dated March 26, 1993 between the Company and
President of India through the Development Commissioner and
Madras, India Lease Letters No. MEPZ/Appln/31/84(1) dated
September 23, 1986, No. 2 LA (18) 92-EM/2458, No.
2/28/93-EM/251, No. 2/LA (18) 92-EM/8872, No. 8/25/84 - MEPZ
dated January 13, 1992, No. 8/25/84 - MEPZ dated May 14,
1985, No. 2 LA (18) 92-EM dated August 3, 1993 from
Government of India, Ministry of Commerce, Madras Export
Processing Zone.
10.5* 1996 Stock Option Plan.
10.6* Form of Incentive Stock Option Agreement.
10.7* Nonqualified Stock Option Agreement dated April 25, 1996
between the Company and Dan Rankin.
10.8* Nonqualified Stock Option Agreement dated April 25, 1996
between the Company and Douglas S. Land.
10.9* Nonqualified Stock Option Agreement dated April 25, 1996
between the Company and Timothy S. Manney.
10.10* U.S. License Agreement dated November 3, 1995 between the
Company and Andersen Consulting LLP, as amended.
10.11* Acquisition Agreement, dated as of July 19, 1996 between the
Company, JF Electra (Mauritius) Limited, CBS Complete
Business Solutions (Mauritius) Limited and Raj Vattikuti
(without Exhibits).
10.12* Shareholders Agreement dated as of July 19, 1996 between JF
Electra (Mauritius) Limited, CBS Complete Business Solutions
(Mauritius) Limited, Complete Business Solutions (India)
Private Limited and Raj Vattikuti (without Exhibits).
10.13* Agreement dated September 14, 1995 between the Company and
NBD Bank N.A., as amended.
10.14* Promissory Note dated December 30, 1996 and Exercise and
Loan Notice and Stock Pledge dated December 30, 1996, each
executed by Douglas S. Land.
10.15* Promissory Note dated December 30, 1996 and Exercise and
Loan Notice and Stock Pledge dated December 30, 1996, each
executed by Timothy S. Manney.
10.16* Incentive Stock Option Agreement dated September 12, 1996
between the Company and Nanjappa Venugopal.
10.17(a)** Nonqualified Stock Option Agreement dated March 3, 1997
between the Company and Frank Stella regarding October 27,
1995 grant date.
10.17(b)** Nonqualified Stock Option Agreement dated March 3, 1997
between the Company and Frank Stella regarding September 12,
1996 grant date.
11.1** Statement re Computation of Per Share Earnings for Pro Forma
Net Income.
11.1(a)** EPS Calculation for Supplemental Net Income.
11.1(b)** EPS Calculation for Pro Forma Net Income.
21.1* Subsidiaries of Registrant.
23.1* Consent of Camhy Karlinsky & Stein LLP (included as part of
Exhibit 5.1).
23.2** Consent of Arthur Andersen LLP.
24.1* Powers of Attorney (included on signature page).
27.1* Financial Data Schedule.
</TABLE>
- -------------------------
* Previously filed.
** Filed herewith.
II-3
<PAGE> 70
ITEM 17. UNDERTAKING
The undersigned Registrant hereby undertakes:
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(2) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) of 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective; and
(3) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described above or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Farmington
Hills, State of Michigan, on March 5, 1997.
COMPLETE BUSINESS SOLUTIONS, INC.
By: /s/ RAJENDRA B. VATTIKUTI
------------------------------------
Rajendra B. Vattikuti
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ RAJENDRA B. VATTIKUTI President, Chief Executive Officer and March 5, 1997
- --------------------------------------------- Director
Rajendra B. Vattikuti
* Executive Vice President of Finance March 5, 1997
- --------------------------------------------- and Administration, Treasurer and
Timothy Manney Director
* Director March 5, 1997
- ---------------------------------------------
Frank Stella
* Director March 5, 1997
- ---------------------------------------------
Douglas Land
*By: /s/ RAJENDRA B. VATTIKUTI
--------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Complete Business Solutions, Inc. and
subsidiaries included in this Registration Statement and have issued our report
thereon dated January 29, 1997. Our audits were made for the purpose of forming
an opinion on the basic consolidated financial statements as a whole. The
schedule of Valuation and Qualifying Accounts -- Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and
regulations and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 29, 1997.
II-6
<PAGE> 73
SCHEDULE II
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DEDUCTIONS -
BALANCE AT CHARGED TO AMOUNTS BALANCE AT
BEGINNING COSTS AND DEEMED TO BE END OF
PERIOD ENDED DESCRIPTION OF PERIOD EXPENSES UNCOLLECTIBLE PERIOD
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1994......... Allowance for uncollectible accounts $ 62 $100 $ (62) $100
December 31, 1995......... Allowance for uncollectible accounts 100 105 (43) 162
December 31, 1996......... Allowance for uncollectible accounts 162 120 (68) 214
</TABLE>
II-7
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Restated Articles of Incorporation of the Company, as
amended.
3.2* Bylaws of the Company.
4.1* See Exhibits 3.1 and 3.2 for provisions of the Restated
Articles of Incorporation and Restated Bylaws of the Company
defining rights of the holders of Common Stock of the
Company.
4.2* Specimen Stock Certificate.
5.1* Opinion of Camhy Karlinsky & Stein LLP, counsel to the
Company, as to the legality of the shares being registered.
10.1* Employment Agreement dated December 12, 1996 between the
Company and Rajendra B. Vattikuti.
10.2* Employment Agreement dated December 12, 1996 between the
Company and Timothy S. Manney.
10.3* Lease dated October 22, 1992 and its seven amendments dated
October 1, 1993, June 14, 1994, June 28, 1994, September 30,
1994, October 14, 1994, August 10, 1995 and August 6, 1996,
between the Company and Orchard Ridge Office Park Limited
Partnership.
10.4* Lease Agreement dated March 26, 1993 between the Company and
President of India through the Development Commissioner and
Madras, India Lease Letters No. MEPZ/Appln/31/84(1) dated
September 23, 1986, No. 2 LA (18) 92-EM/2458, No.
2/28/93-EM/251, No. 2/LA (18) 92-EM/8872, No. 8/25/84 - MEPZ
dated January 13, 1992, No. 8/25/84 - MEPZ dated May 14,
1985, No. 2 LA (18) 92-EM dated August 3, 1993 from
Government of India, Ministry of Commerce, Madras Export
Processing Zone.
10.5* 1996 Stock Option Plan.
10.6* Form of Incentive Stock Option Agreement.
10.7* Nonqualified Stock Option Agreement dated April 25, 1996
between the Company and Dan Rankin.
10.8* Nonqualified Stock Option Agreement dated April 25, 1996
between the Company and Douglas S. Land.
10.9* Nonqualified Stock Option Agreement dated April 25, 1996
between the Company and Timothy S. Manney.
10.10* U.S. License Agreement dated November 3, 1995 between the
Company and Andersen Consulting LLP, as amended.
10.11* Acquisition Agreement, dated as of July 19, 1996 between the
Company, JF Electra (Mauritius) Limited, CBS Complete
Business Solutions (Mauritius) Limited and Raj Vattikuti
(without Exhibits).
10.12* Shareholders Agreement dated as of July 19, 1996 between JF
Electra (Mauritius) Limited, CBS Complete Business Solutions
(Mauritius) Limited, Complete Business Solutions (India)
Private Limited and Raj Vattikuti (without Exhibits).
10.13* Agreement dated September 14, 1995 between the Company and
NBD Bank N.A., as amended.
10.14* Promissory Note dated December 30, 1996 and Exercise and
Loan Notice and Stock Pledge dated December 30, 1996, each
executed by Douglas S. Land.
10.15* Promissory Note dated December 30, 1996 and Exercise and
Loan Notice and Stock Pledge dated December 30, 1996, each
executed by Timothy S. Manney.
</TABLE>
<PAGE> 75
<TABLE>
<C> <S>
10.16* Incentive Stock Option Agreement dated September 12, 1996 between the Company and Nanjappa
Venugopal.
10.17(a)** Nonqualified Stock Option Agreement dated March 3, 1997 between the Company and Frank Stella
regarding October 27, 1995 grant date.
10.17(b)** Nonqualified Stock Option Agreement dated March 3, 1997 between the Company and Frank Stella
regarding September 12, 1996 grant date.
11.1** Statement re Computation of Per Share Earnings for Pro Forma Net Income.
11.1(a)** EPS Calculation for Supplemental Net Income.
11.1(b)** EPS Calculation For Pro Forma Net Income.
21.1* Subsidiaries of Registrant.
23.1* Consent of Camhy Karlinsky & Stein LLP (included as part of Exhibit 5.1).
23.2** Consent of Arthur Andersen LLP.
24.1* Powers of Attorney (included on signature page).
27.1* Financial Data Schedule.
</TABLE>
- -------------------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 10.17(a)
AGREEMENT
This Nonqualified Stock Option Agreement ("Agreement") dated as of March 3,
1997 by and between COMPLETE BUSINESS SOLUTIONS, INC. ("Company"), a Michigan
corporation, having an office at 32605 West 12 Mile Road, Suite 250, Farmington
Hills, Michigan 48334 and FRANK STELLA ("Holder"), an individual.
W I T N E S S E T H :
WHEREAS, the Company is a privately held Subchapter S corporation;
WHEREAS, the Company has the authority to issue additional shares of
the Company's common stock (all of the Company's shares of common stock being
hereinafter referred to as "Common Stock");
WHEREAS, Holder has provided valuable services to the Company by
serving as a director on its Board of Directors;
WHEREAS, the Company desires to document its previous commitment to
grant Holder an option to purchase a portion of the Company's Common Stock,
upon the price, terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the terms and covenants contained
herein, and for other good and valuable consideration, the sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. Option.
Holder shall have the right, at his sole and absolute option, to
purchase on terms and conditions hereinafter set forth, all or any part of the
aggregate of 14,856 shares of Common Stock of the Company (collectively, the
"Option Shares") at the purchase price of $4.21 per share (the "Option Price").
Such right is hereinafter referred to as the "Option". The Option Shares and
the Option Price have been adjusted from the 2.5 shares at $25,000 per share
granted to the Holder on October 27, 1995 (the "Grant Date"), to reflect the
10,000 to one split of the Company's outstanding shares of Common Stock which
occurred on September 10, 1996 and the .5942275 to one combination of the
Company's outstanding shares of Common Stock which occurred on February 3,
1997.
2. Exercise; Expiration Date.
(a) EXERCISE: The Option shall be exercisable in full three years after
the Grant Date. On each anniversary of the Grant Date, the Holder may purchase
a cumulative installment of one third of the Option Shares, so that from and
after the third anniversary of the Grant Date the Holder may purchase all of
the Option Shares. The Option may be exercised in whole or in
<PAGE> 2
part, at the option of Holder, on or before the Expiration Date (hereinafter
defined) by delivering to the Company written notice of Holder's exercise
("Exercise Notice") stating the amount of Option Shares to be purchased
thereby, accompanied by a check ("Check") made payable to the order of the
Company for the aggregate sum due for the Option Shares then being purchased.
As soon as practicable thereafter, and in any event within ten (10) business
days of the Company's receipt of the Exercise Notice and a Check, the Company
shall issue and deliver to Holder a certificate representing the Option Shares
being purchased pursuant to such Exercise Notice. Each such certificate shall
bear the legend or legends required by applicable securities laws as well as
such other legends the Company requires to be included on certificates for its
Common Stock. Such certificate or certificates shall be deemed to have been
issued and Holder or any other persons so designated to be named therein shall
be deemed for all purposes to have become a holder of record of such shares as
of the date the Exercise Notice is delivered to the Company. In the case of an
exercise for less than all of the Option Shares permitted to be purchased
hereunder, the Holder shall reserve the right to exercise the Option at any
time and from time to time prior to the Expiration Date for the remainder of
the Option Shares.
(b) EXPIRATION DATE: The term "Expiration Date" shall mean ten (10)
years from the Grant Date, at 5:00 P.M. Detroit time on such date or if such
date shall be a federal holiday, a Saturday or a Sunday, then 5:00 P.M. Detroit
time the next following day which is not a federal holiday, a Saturday or a
Sunday.
3. Anti-Dilution Provisions.
(a) The number of shares of Option Shares and the exercise price per
share shall be subject to adjustment from time to time as provided for in this
Section 3(a). Notwithstanding any provision contained herein, the aggregate
Option Price for the total number of Option Shares issuable pursuant to the
Option shall remain unchanged. In case the Company shall at any time change as
a whole, by subdivision, combination, acquisition or sale in any manner or by
the making of a stock split or stock dividend or by changing the number of
outstanding shares of Common Stock into a different number of shares, (i) the
number of shares which Holder shall have been entitled to purchase pursuant to
this Agreement shall be increased or decreased in direct proportion to such
increase or decrease of shares, as the case may be, and (ii) the Option Price
(but not the aggregate Option Price of all such shares) in effect immediately
prior to such change shall be increased or decreased in inverse proportion to
such increase or decrease of shares, as the case may be. In addition, and
without limiting the foregoing, it is the parties' intention hereto that the
Option Price respective to the Option Shares shall at all times be equal to or
less than the lowest price per share for additional shares of Common Stock
hereafter issued at less than fair market value or deemed to be hereafter
issued at less than fair market value upon the issuance of any warrants,
options or other subscription rights with respect to Common Stock or other
securities convertible into Common Stock or the issuance of any warrants,
options or any similar rights with respect to such convertible securities (all
such shares or instruments of the Company being referred to herein collectively
as "Securities"). Accordingly, upon any issuance or deemed issuance of
Securities at a price per share which is less than the then current fair market
value of such Securities and less than the lowest price per share of the Option
Shares, the per share price of the Option Shares shall be forthwith reduced to
an amount equal to the lowest price per share of Securities so issued. If the
2
<PAGE> 3
Company shall in any manner grant, issue or sell any Securities whether or not
same or the right to convert or exchange any of same are immediately
exercisable, the Company will be deemed to have issued or sold Common Stock.
(b) If, under this Paragraph 3, the purchase price provided for in any
Securities, the additional consideration, if any, payable upon the conversion
or exchange of any such Securities, or the rate at which any of same are
convertible into or exchangeable for Common Stock shall change at any time
(other than under or by reason of provisions designed to protect against
dilution), the Option Price in effect at the time of such event shall forthwith
be readjusted to the respective Option Price which would have been in effect at
such time had such Securities still remained outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold. If the purchase
price provided for in any such Securities shall be reduced at any time under or
by reason of provisions with respect thereto designed to protect against
dilution, then, in case of the delivery of Common Stock upon the exercise of
any such Securities or upon conversion or exchange of any such Securities, the
Option Price in effect hereunder shall forthwith be adjusted to such respective
amounts as would have been effective upon the issuance of the shares of Common
Stock delivered as aforesaid.
(c) Upon the expiration of any Securities or the termination of any
right to convert or exchange any Securities without the exercise of a stock
option or right, the Option Price then in effect will be adjusted to the
respective Option Price which would have been in effect at the time of such
expiration or termination had such Securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued.
(d) In case any shares of Common Stock and Securities shall be issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received upon such issuance or sale, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith. In case any shares of Common
Stock and Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration as determined in
good faith by the Board of Directors of the Company, without deduction of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith. In case any shares of Common
Stock or Securities shall be issued in connection with the issue and sale of
other securities of the Company, together comprising one integral transaction
in which no specific consideration is allocated to such shares of Common Stock
or Securities by the parties thereto, such shares of Common Stock or Securities
shall be deemed to have been issued at a rate of $.01 per share of Common
Stock.
(e) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company,
and the disposition of any such shares shall be considered an issue or sale of
Common Stock for the purposes of this Paragraph 3.
(f) Upon any adjustment of an Option Price, then and in each such case
the Company shall give written notice thereof to Holder, which notice shall
state the Option Price
3
<PAGE> 4
resulting from such adjustment and the increase or decrease, if any, in the
number of shares of Common Stock purchasable at such price upon the exercise of
the Option, setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
(g) In case of any capital reorganization or any reclassification of
the Common Stock of the Company or in case of the consolidation or merger of
the Company with another corporation (or in the case of any sale, transfer, or
other disposition to another corporation of all or substantially all the
property, assets, business, and goodwill of the Company), Holder shall
thereafter be entitled to purchase the same kind and amount of shares of
capital stock which the Option entitled Holder to purchase immediately prior to
such capital reorganization, reclassification of capital stock, consolidation,
merger, sale, transfer, or other disposition; and in any such case appropriate
adjustments shall be made in the application of the provisions of this
Paragraph 3 with respect to rights and interests thereafter of Holder to the
end that the provisions of this Paragraph 3 shall thereafter be applicable, as
near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of the Option.
(h) No certificate for fractional shares shall be issued upon the
exercise of the Option, but in lieu thereof the Company shall purchase any such
fractional shares calculated to the nearest cent.
(i) In addition to the foregoing, if the Company shall acquire any
entity and Holder shall in its sole discretion consider that the acquisition is
made at other than fair value, an adjustment should fairly and appropriately be
made to the Common Stock and the Option Shares so that the value of Common
Stock and Option Shares is, in the agreed opinion of Holder and Company, the
same as it would have been if such acquisition had been made at fair value.
Such adjustment shall become effective (if appropriate) retroactively, on the
day on which the acquisition in question is completed. If Holder and the
Company cannot agree on an appropriate adjustment as required to reflect the
fair value, the independent auditor of the Company shall choose a nationally
recognized valuation firm to make the determination of the required adjustment
(if any). The choice of the valuation firm and the determination of the
valuation firm shall be final and binding.
4. Repurchase Obligation.
At Holder's option the Company shall repurchase any Option Shares of
the Company owned by Holder at any time. The repurchase price shall be
equivalent to the option price as set forth in Paragraph 1 of this Agreement.
This repurchase obligation shall be terminated at the time the Company
completes an initial public offering of its common stock.
5. Holder's Income Tax Coverage,
For so long as the Company shall be a Subchapter S corporation, the
Company agrees that notwithstanding any of its distributions, dividends or
payments made to the shareholders of the Company, the Company shall pay to
Holder after any exercise of the Option, an amount not less dm Holder's
federal, state and local personal income tax liability in the aggregate as a
result of the Company's income for the preceding calendar year. Distributions
will be made on a pro rata
4
<PAGE> 5
basis based upon percentage ownership of stock of the Company. Nothing in this
Agreement is intended to create a second class of stock in accordance with
Section 1361 (b) (1) (D) of the Internal Revenue Code of 1986 as amended which
would result in the termination of the Company's S Corporation election. Any
provision in this Agreement which is deemed to create such a second class of
stock is null and void.
6. Change of Ownership Protection.
If fifty percent (50%) or more of the ownership of the Company is
transferred, sold or otherwise disposed of in one (1) or more transactions,
then as part of such transfer, sale or other disposition; then, at Holder's
request, any and all shares of Common Stock held by Holder shall be
simultaneously transferred, sold or disposed of therewith at a per share price
no less than the highest per share price paid for the other shares of Common
Stock then being transferred, sold or otherwise disposed of..
7. Assignability.
The Option granted herein may not be pledged, assigned, transferred, sold
or otherwise disposed of by Holder without the prior written consent of the
Company other than to Holder's family trusts, family members, household
members, estate trusts, retirement plans or by Will or by the laws of descent
and distribution.
8. Reservation of Shares.
The Company covenants that it will, at all times, reserve and keep
available out of its authorized Common Stock solely for the purpose of issuance
upon exercise of the Option, such number of shares of Common Stock as shall
then be issuable upon the exercise of the Option. The Company agrees that,
upon issuance in accordance with the terms and conditions of this Agreement,
all Option Shares shall be duly and validly issued and fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof.
9. Loss or Mutilation.
Upon receipt by the Company of reasonable evidence of the loss, theft,
destruction, or mutilation of this Agreement, the Company shall execute and
deliver in lieu thereof a new Agreement representing an equal number of Option
Shares exercisable thereunder.
10. Transfer Taxes; Expenses.
The Company shall pay any and all brokerage fees, transfer taxes and
expenses incidental to the exercise of the Option and shall pay all the fees
and expenses of any special attorneys or accountants retained by it in
connection therewith.
5
<PAGE> 6
11. Notice.
Any notice and other communication given pursuant to the provisions of
this Agreement shall be in writing and shall be given (i) by mailing the same
by certified mail or registered mail, return receipt requested, postage
prepaid, (ii) by hand, providing for receipted delivery, or (iii) by reputable
overnight courier providing for receipted delivery. Except as may be expressly
otherwise provided in this Agreement, any such notice or other communication
given by mail shall be deemed given two (2) business days after same is mailed
and any such notice or other communication given by hand or overnight courier
as aforesaid shall be deemed given when received or when receipt is refused.
If sent to the Company, such notices or other communication shall be sent to
the Company at 32605 West 12 Mile Road, Suite 250, Farmington Hills, Michigan
48334, or at such other address or addresses as the Company may hereafter
designate by notice to Holder. If sent to Holder, such notices or other
communications shall be sent to Holder at 7000 Fenkell, Detroit, Michigan
48238, or at such other address or addresses as Holder may hereafter designate
by notice to the Company.
12. Governing Law.
This Agreement shall be governed by and construed in accordance with, the
laws of the State of Michigan, without giving effect to any conflicts of laws.
[Paragraphs 13 and 14 were intentionally omitted.]
15. Indemnity.
(a) To the full extent permitted by law the Company shall save Holder
harmless from and indemnify Holder and his heirs, executors and administrators
against any and all injury, loss, damage, costs, expenses, claims, suits,
actions or proceedings (including, without limitation, reasonable attorney's
fees) and against any payments in settlement of any such claims, suits, actions
or proceedings or in satisfaction of any related judgment, fine or penalty
caused by or resulting from any act, omission, negligence or willful conduct of
Holder or Holder's agents no matter how caused from Holder's involvement with
the Company its subsidiaries and affiliates, including, without limitation,
being a shareholder, member of board of directors, trustee of a Company benefit
plan, officer or consultant of the Company its subsidiaries and affiliates.
(b) To the full extent permitted by law the Company shall advance all
reasonable expenses incurred by or on behalf of Holder in connection with any
proceeding by reason of Holder's corporate status within ten (10) days after
the receipt by the Company of a statement or statements from Holder requesting
such advance or advances from time to time, whether prior to or after final
disposition of such proceeding. Such statement or statements shall reasonably
evidence the expenses incurred by Holder and shall include or be preceded or
accompanied by an undertaking by or on behalf of Holder to repay any
expenses advanced if it shall ultimately
6
<PAGE> 7
be determined that Holder is not entitled to be indemnified against such
expenses. Any advances and undertakings to repay pursuant to this Paragraph 15
shall be unsecured and interest free.
(c) The obligations of the Company contained in this indemnity clause
shall continue during the period Holder is a director or employee of the
Company (or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise) and shall continue thereafter so long as Holder
shall be subject to any proceeding by reason of his corporate status, whether
or not he is acting or serving in any such capacity at the time any liability
or expense is incurred for which indemnification can be provided under this
Agreement. Such rights of indemnification and reimbursement shall not be
deemed exclusive of any other rights to which Holder may be entitled under any
statute, agreement, vote of shareholders or otherwise.
16. Successors and Assigns.
This Agreement shall inure to the benefit of the Company and Holder and
their respective successors and permitted assigns.
17. Entire Agreement.
This Agreement constitutes the entire agreement of the Company and Holder
as to its subject matter and supersedes any previous written or oral agreement
or understanding between the Company and Holder with respect to such subject
matter.
18. Counterparts.
This Agreement may be executed in duplicate originals, each of which when
taken together shall be deemed an original.
19 Amendment.
This Agreement may not be modified except in a writing signed by both
parties hereto.
COMPLETE BUSINESS SOLUTIONS, INC.
By: /s/ Rajendra B. Vattikuti
----------------------------
Name: Rajendra B. Vattikuti
Title: President
/s/ Frank Stella
----------------------------
Frank Stella
7
<PAGE> 1
EXHIBIT 10.17(b)
AGREEMENT
This Nonqualified Stock Option Agreement ("Agreement") dated as of March 3,
1997 by and between COMPLETE BUSINESS SOLUTIONS, INC. ("Company"), a Michigan
corporation, having an office at 32605 West 12 Mile Road, Suite 250, Farmington
Hills, Michigan 48334 and FRANK STELLA ("Holder"), an individual.
W I T N E S S E T H :
WHEREAS, the Company is a privately held Subchapter S corporation;
WHEREAS, the Company has the authority to issue additional shares of the
Company's common stock (all of the Company's shares of common stock being
hereinafter referred to as "Common Stock");
WHEREAS, Holder has provided valuable services to the Company by serving
as a director on its Board of Directors;
WHEREAS, the Company desires to document its previous commitment to grant
Holder an option to purchase a portion of the Company's Common Stock, upon the
price, terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the terms and covenants contained
herein, and for other good and valuable consideration, the sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. Option.
Holder shall have the right, at his sole and absolute option, to
purchase on terms and conditions hereinafter set forth, all or any part of the
aggregate of 8,914 shares of Common Stock of the Company (collectively, the
"Option Shares") at the purchase price of $8.41 per share (the "Option Price").
Such right is hereinafter referred to as the "Option". The Option Shares and
the Option Price have been adjusted from the 15,000 shares at $5.00 per share
granted to the Holder on September 12, 1996 (the "Grant Date"), to reflect the
.5942275 to one combination of the Company's outstanding shares of Common Stock
which occurred on February 3, 1997.
2. Exercise; Expiration Date.
(a) EXERCISE: The Option shall be exercisable in full three years after
the Grant Date. On each anniversary of the Grant Date, the Holder may purchase
a cumulative installment of one third of the Option Shares, so that from and
after the third anniversary of the Grant Date the Holder may purchase all of
the Option Shares. The Option may be exercised in whole or in part, at the
option of Holder, on or before the Expiration Date (hereinafter defined) by
delivering to the Company written notice of Holder's exercise ("Exercise
Notice") stating the amount of
<PAGE> 2
Option Shares to be purchased thereby, accompanied by a check ("Check") made
payable to the order of the Company for the aggregate sum due for the Option
Shares then being purchased. As soon as practicable thereafter, and in any
event within ten (10) business days of the Company's receipt of the Exercise
Notice and a Check, the Company shall issue and deliver to Holder a certificate
representing the Option Shares being purchased pursuant to such Exercise
Notice. Each such certificate shall bear the legend or legends required by
applicable securities laws as well as such other legends the Company requires
to be included on certificates for its Common Stock. Such certificate or
certificates shall be deemed to have been issued and Holder or any other
persons so designated to be named therein shall be deemed for all purposes to
have become a holder of record of such shares as of the date the Exercise
Notice is delivered to the Company. In the case of an exercise for less than
all of the Option Shares permitted to be purchased hereunder, the Holder shall
reserve the right to exercise the Option at any time and from time to time
prior to the Expiration Date for the remainder of the Option Shares.
(b) EXPIRATION DATE: The term "Expiration Date" shall mean ten (10)
years from the Grant Date, at 5:00 P.M. Detroit time on such date or if such
date shall be a federal holiday, a Saturday or a Sunday, then 5:00 P.M. Detroit
time the next following day which is not a federal holiday, a Saturday or a
Sunday.
3. Anti-Dilution Provisions.
(a) The number of shares of Option Shares and the exercise price per
share shall be subject to adjustment from time to time as provided for in this
Section 3(a). Notwithstanding any provision contained herein, the aggregate
Option Price for the total number of Option Shares issuable pursuant to the
Option shall remain unchanged. In case the Company shall at any time change as
a whole, by subdivision, combination, acquisition or sale in any manner or by
the making of a stock split or stock dividend or by changing the number of
outstanding shares of Common Stock into a different number of shares, (i) the
number of shares which Holder shall have been entitled to purchase pursuant to
this Agreement shall be increased or decreased in direct proportion to such
increase or decrease of shares, as the case may be, and (ii) the Option Price
(but not the aggregate Option Price of all such shares) in effect immediately
prior to such change shall be increased or decreased in inverse proportion to
such increase or decrease of shares, as the case may be. In addition, and
without limiting the foregoing, it is the parties' intention hereto that the
Option Price respective to the Option Shares shall at all times be equal to or
less than the lowest price per share for additional shares of Common Stock
hereafter issued at less than fair market value or deemed to be hereafter
issued at less than fair market value upon the issuance of any warrants,
options or other subscription rights with respect to Common Stock or other
securities convertible into Common Stock or the issuance of any warrants,
options or any similar rights with respect to such convertible securities (all
such shares or instruments of the Company being referred to herein collectively
as "Securities"). Accordingly, upon any issuance or deemed issuance of
Securities at a price per share which is less than the then current fair market
value of such Securities and less than the lowest price per share of the Option
Shares, the per share price of the Option Shares shall be forthwith reduced to
an amount equal to the lowest price per share of Securities so issued. If the
Company shall in any manner grant, issue or sell any Securities whether or not
same or the right to
2
<PAGE> 3
convert or exchange any of same are immediately exercisable, the Company will
be deemed to have issued or sold Common Stock.
(b) If, under this Paragraph 3, the purchase price provided for in any
Securities, the additional consideration, if any, payable upon the conversion
or exchange of any such Securities, or the rate at which any of same are
convertible into or exchangeable for Common Stock shall change at any time
(other than under or by reason of provisions designed to protect against
dilution), the Option Price in effect at the time of such event shall forthwith
be readjusted to the respective Option Price which would have been in effect at
such time had such Securities still remained outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold. If the purchase
price provided for in any such Securities shall be reduced at any time under or
by reason of provisions with respect thereto designed to protect against
dilution, then, in case of the delivery of Common Stock upon the exercise of
any such Securities or upon conversion or exchange of any such Securities, the
Option Price in effect hereunder shall forthwith be adjusted to such respective
amounts as would have been effective upon the issuance of the shares of Common
Stock delivered as aforesaid.
(c) Upon the expiration of any Securities or the termination of any
right to convert or exchange any Securities without the exercise of a stock
option or right, the Option Price then in effect will be adjusted to the
respective Option Price which would have been in effect at the time of such
expiration or termination had such Securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued.
(d) In case any shares of Common Stock and Securities shall be issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received upon such issuance or sale, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith. In case any shares of Common
Stock and Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration as determined in
good faith by the Board of Directors of the Company, without deduction of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith. In case any shares of Common
Stock or Securities shall be issued in connection with the issue and sale of
other securities of the Company, together comprising one integral transaction
in which no specific consideration is allocated to such shares of Common Stock
or Securities by the parties thereto, such shares of Common Stock or Securities
shall be deemed to have been issued at a rate of $.01 per share of Common
Stock.
(e) The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company,
and the disposition of any such shares shall be considered an issue or sale of
Common Stock for the purposes of this Paragraph 3.
(f) Upon any adjustment of an Option Price, then and in each such case
the Company shall give written notice thereof to Holder, which notice shall
state the Option Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares of
3
<PAGE> 4
Common Stock purchasable at such price upon the exercise of the Option,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(g) In case of any capital reorganization or any reclassification of
the Common Stock of the Company or in case of the consolidation or merger of
the Company with another corporation (or in the case of any sale, transfer, or
other disposition to another corporation of all or substantially all the
property, assets, business, and goodwill of the Company), Holder shall
thereafter be entitled to purchase the same kind and amount of shares of
capital stock which the Option entitled Holder to purchase immediately prior to
such capital reorganization, reclassification of capital stock, consolidation,
merger, sale, transfer, or other disposition; and in any such case appropriate
adjustments shall be made in the application of the provisions of this
Paragraph 3 with respect to rights and interests thereafter of Holder to the
end that the provisions of this Paragraph 3 shall thereafter be applicable, as
near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of the Option.
(h) No certificate for fractional shares shall be issued upon the
exercise of the Option, but in lieu thereof the Company shall purchase any such
fractional shares calculated to the nearest cent.
(i) In addition to the foregoing, if the Company shall acquire any
entity and Holder shall in its sole discretion consider that the acquisition is
made at other than fair value, an adjustment should fairly and appropriately be
made to the Common Stock and the Option Shares so that the value of Common
Stock and Option Shares is, in the agreed opinion of Holder and Company, the
same as it would have been if such acquisition had been made at fair value.
Such adjustment shall become effective (if appropriate) retroactively, on the
day on which the acquisition in question is completed. If Holder and the
Company cannot agree on an appropriate adjustment as required to reflect the
fair value, the independent auditor of the Company shall choose a nationally
recognized valuation firm to make the determination of the required adjustment
(if any). The choice of the valuation firm and the determination of the
valuation firm shall be final and binding.
4. Repurchase Obligation.
At Holder's option the Company shall repurchase any Option Shares of
the Company owned by Holder at any time. The repurchase price shall be
equivalent to the option price as set forth in Paragraph 1 of this Agreement.
This repurchase obligation shall be terminated at the time the Company
completes an initial public offering of its common stock.
5. Holder's Income Tax Coverage,
For so long as the Company shall be a Subchapter S corporation, the
Company agrees that notwithstanding any of its distributions, dividends or
payments made to the shareholders of the Company, the Company shall pay to
Holder after any exercise of the Option, an amount not less dm Holder's
federal, state and local personal income tax liability in the aggregate as a
result of the Company's income for the preceding calendar year. Distributions
will be made on a pro rata basis based upon percentage ownership of stock of
the Company. Nothing in this Agreement is
4
<PAGE> 5
intended to create a second class of stock in accordance with Section 1361 (b)
(1) (D) of the Internal Revenue Code of 1986 as amended which would result in
the termination of the Company's S Corporation election. Any provision in this
Agreement which is deemed to create such a second class of stock is null and
void.
6. Change of Ownership Protection.
If fifty percent (50%) or more of the ownership of the Company is
transferred, sold or otherwise disposed of in one (1) or more transactions,
then as part of such transfer, sale or other disposition; then, at Holder's
request, any and all shares of Common Stock held by Holder shall be
simultaneously transferred, sold or disposed of therewith at a per share price
no less than the highest per share price paid for the other shares of Common
Stock then being transferred, sold or otherwise disposed of..
7. Assignability.
The Option granted herein may not be pledged, assigned, transferred, sold
or otherwise disposed of by Holder without the prior written consent of the
Company other than to Holder's family trusts, family members, household
members, estate trusts, retirement plans or by Will or by the laws of descent
and distribution.
8. Reservation of Shares.
The Company covenants that it will, at all times, reserve and keep
available out of its authorized Common Stock solely for the purpose of issuance
upon exercise of the Option, such number of shares of Common Stock as shall
then be issuable upon the exercise of the Option. The Company agrees that,
upon issuance in accordance with the terms and conditions of this Agreement,
all Option Shares shall be duly and validly issued and fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof.
9. Loss or Mutilation.
Upon receipt by the Company of reasonable evidence of the loss, theft,
destruction, or mutilation of this Agreement, the Company shall execute and
deliver in lieu thereof a new Agreement representing an equal number of Option
Shares exercisable thereunder.
10. Transfer Taxes; Expenses.
The Company shall pay any and all brokerage fees, transfer taxes and
expenses incidental to the exercise of the Option and shall pay all the fees
and expenses of any special attorneys or accountants retained by it in
connection therewith.
5
<PAGE> 6
11. Notice.
Any notice and other communication given pursuant to the provisions of
this Agreement shall be in writing and shall be given (i) by mailing the same
by certified mail or registered mail, return receipt requested, postage
prepaid, (ii) by hand, providing for receipted delivery, or (iii) by reputable
overnight courier providing for receipted delivery. Except as may be expressly
otherwise provided in this Agreement, any such notice or other communication
given by mail shall be deemed given two (2) business days after same is mailed
and any such notice or other communication given by hand or overnight courier
as aforesaid shall be deemed given when received or when receipt is refused.
If sent to the Company, such notices or other communication shall be sent to
the Company at 32605 West 12 Mile Road, Suite 250, Farmington Hills, Michigan
48334, or at such other address or addresses as the Company may hereafter
designate by notice to Holder. If sent to Holder, such notices or other
communications shall be sent to Holder at 7000 Fenkell, Detroit, Michigan
48238, or at such other address or addresses as Holder may hereafter designate
by notice to the Company.
12. Governing Law.
This Agreement shall be governed by and construed in accordance with, the
laws of the State of Michigan, without giving effect to any conflicts of laws.
[Paragraphs 13 and 14 were intentionally omitted.]
15. Indemnity.
(a) To the full extent permitted by law the Company shall save Holder
harmless from and indemnify Holder and his heirs, executors and administrators
against any and all injury, loss, damage, costs, expenses, claims, suits,
actions or proceedings (including, without limitation, reasonable attorney's
fees) and against any payments in settlement of any such claims, suits, actions
or proceedings or in satisfaction of any related judgment, fine or penalty
caused by or resulting from any act, omission, negligence or willful conduct of
Holder or Holder's agents no matter how caused from Holder's involvement with
the Company its subsidiaries and affiliates, including, without limitation,
being a shareholder, member of board of directors, trustee of a Company benefit
plan, officer or consultant of the Company its subsidiaries and affiliates.
(b) To the full extent permitted by law the Company shall advance all
reasonable expenses incurred by or on behalf of Holder in connection with any
proceeding by reason of Holder's corporate status within ten (10) days after
the receipt by the Company of a statement or statements from Holder requesting
such advance or advances from time to time, whether prior to or after final
disposition of such proceeding. Such statement or statements shall reasonably
evidence the expenses incurred by Holder and shall include or be preceded or
accompanied by an undertaking by or on behalf of Holder to repay any
expenses advanced if it shall ultimately
6
<PAGE> 7
be determined that Holder is not entitled to be indemnified against such
expenses. Any advances and undertakings to repay pursuant to this Paragraph 15
shall be unsecured and interest free.
(c) The obligations of the Company contained in this indemnity clause
shall continue during the period Holder is a director or employee of the
Company (or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise) and shall continue thereafter so long as Holder
shall be subject to any proceeding by reason of his corporate status, whether
or not he is acting or serving in any such capacity at the time any liability
or expense is incurred for which indemnification can be provided under this
Agreement. Such rights of indemnification and reimbursement shall not be
deemed exclusive of any other rights to which Holder may be entitled under any
statute, agreement, vote of shareholders or otherwise.
16. Successors and Assigns.
This Agreement shall inure to the benefit of the Company and Holder and
their respective successors and permitted assigns.
17. Entire Agreement.
This Agreement constitutes the entire agreement of the Company and Holder
as to its subject matter and supersedes any previous written or oral agreement
or understanding between the Company and Holder with respect to such subject
matter.
18. Counterparts.
This Agreement may be executed in duplicate originals, each of which when
taken together shall be deemed an original.
19. Amendment.
This Agreement may not be modified except in a writing signed by both
parties hereto.
COMPLETE BUSINESS SOLUTIONS, INC.
By: /s/ Rajendra B. Vattikuti
-----------------------------
Name: Rajendra B. Vattikuti
Title: President
/s/ Frank Stella
------------------------------
Frank Stella
7
<PAGE> 1
EXHIBIT 11.1
EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
PRO FORMA NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996
<S> <C> <C>
Weighted average number of shares of
common stock outstanding 5,942,275 5,943,659
Common stock equivalents calculated
using the weighted average stock price
per share for the years presented 5,307 266,377
Stock options and convertible stock
issued during the twelve months
immediately preceding the offering date
(using the treasury stock method and
the proposed initial public offering
price per share) 641,501 641,501
Stock issued to satisfy S Corporation
distribution based upon the proposed
initial public offering price per share 806,452 806,452
-------------------------------
Pro forma weighted average shares
outstanding 7,395,535 7,657,989
===============================
Pro forma net income (Note B) $ 887,000 $ 2,443,000
===============================
Pro forma net income common share $ 0.12 $ 0.32
===============================
</TABLE>
Note A: The pro forma fully-diluted computations for the year ended December
31, 1995 and 1996, respectively, are not reported as the calculation
did not exceed 3% of the pro forma primary calculation.
Note B: The pro forma net income shown above reflects the incremental 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 years presented.
<PAGE> 1
EXHIBIT 11.1(a)
EXHIBIT 11.1 (a) - COMPUTATION OF PER SHARE EARNINGS
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
SUPPLEMENTAL NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
<S> <C> <C>
1995 1996
Weighted average number of shares of
common stock outstanding 5,942,275 5,943,659
Common stock equivalents calculated
using the weighted average stock price
per share for the years presented 5,307 266,377
Stock options and convertible stock
issued during the twelve months
immediately preceding the offering date
(using the treasury stock method and
the proposed initial public offering
price per share) 641,501 641,501
Stock issued to satisfy S Corporation
distribution based upon the proposed
initial public offering price per share 806,452 806,452
Stock issued to repay indebtedness
based upon the proposed intial public
offering price per share 565,950 554,749
-------------------------------
Supplemental weighted average shares
outstanding 7,961,485 8,212,738
===============================
Supplemental net income (Note A) $ 1,515,000 $ 2,836,000
===============================
Supplemental net income per common share $ 0.19 $ 0.35
===============================
</TABLE>
Note A: Supplemental net income reflects pro forma net income from Exhibit 11.1
and the elimination of interest expense related to the use of
proceeds, net of related income tax effects using an assumed
effective tax rate.
<PAGE> 1
EXHIBIT 11.1(b)
EXHIBIT 11.1 (b) - COMPUTATION OF PER SHARE EARNINGS
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
PRO FORMA NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996
<S> <C> <C>
Weighted average number of shares of
common stock outstanding 5,942,275 5,943,659
Common stock equivalents calculated
using the weighted average stock price
per share for the years presented 5,307 266,377
Stock options and convertible stock
issued during the twelve months
immediately preceding the offering date
(using the treasury stock method and
the proposed initial public offering
price per share) 641,501 641,501
Stock issued to satisfy S Corporation
distribution based upon the proposed
initial public offering price per share 806,452 806,452
Stock issued to repay indebtedness based
upon the proposed initial public
offering price per share 565,950 554,749
---------------------------
Pro forma weighted average shares
outstanding 7,961,485 8,212,738
===========================
Pro forma net income (Note A) $1,454,000 $2,820,000
===========================
Pro forma net income per common share $ 0.18 $ 0.34
===========================
</TABLE>
Note A: The pro forma net income shown above reflects: (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) the elimination of interest
expense to give effect to the repayment of the Company's
revolving credit facility and long-term debt; and (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.
<PAGE> 1
EXHIBIT 23.2
ARTHUR ANDERSEN LLP
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
Amendment No 3 to the Registration Statement.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
March 4, 1997
