<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 7, 1998
COMPLETE BUSINESS SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-22141 38-2606945
(COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
32605 WEST TWELVE MILE ROAD, SUITE 250, FARMINGTON HILLS, MI 48334
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(248) 488-2088
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME AND FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE> 2
Complete Business Solutions, Inc. (the "Company") hereby amends and restates
Item 7 of its report on Form 8-K dated January 7, 1998, as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
1. The audited financial statements of c.w. Costello & Associates, inc.
as of December 31, 1997 and 1996 and for the years ended
December 31, 1997, 1996 and 1995.
2
<PAGE> 3
c.w. COSTELLO & ASSOCIATES, inc.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 4
FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995:
Balance Sheets as of December 31, 1997 and 1996 5
Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995 6
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 7
Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 8
Notes to Financial Statements 9-14
3
<PAGE> 4
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
c.w. Costello & Associates, inc.
Wethersfield, Connecticut
We have audited the accompanying balance sheets of c.w. Costello & Associates,
inc. (an "S" Corporation) (the "Company") as of December 31, 1997 and 1996,
and the related statements of operations, stockholders' equity and of cash
flows for each of the three years in the period ended December 31, 1997.
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, such financial statements present fairly, in all material
respects, the financial position of c.w. Costello & Associates, inc. (an "S"
Corporation) as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, on January 27, 1998, the
company merged with Complete Business Solutions, Inc.
Deloitte & Touche LLP
February 9, 1998
4
<PAGE> 5
c.w. COSTELLO & ASSOCIATES, inc.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash $ 224,302 $ 194,058
Accounts receivable less allowance for doubtful accounts of
$428,548 and $380,488 at December 31, 1997 and 1996, respectively 12,510,249 9,017,822
Unbilled Revenue 889,147 1,002,213
Other current assets - net 638,409 145,637
Receivables from related parties - current 235,441 233,209
------------ -----------
Total current assets 14,497,548 10,592,939
PROPERTY AND EQUIPMENT - Net 1,914,615 1,154,646
RECEIVABLES FROM RELATED PARTIES - Net of
current portion 240,067 135,634
------------ -----------
TOTAL $ 16,652,230 $11,883,219
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 603,603 935,399
Other accrued expenses 2,552,787 559,343
Accrued payroll and related expenses 7,684,579 1,750,443
Notes payable - line of credit 3,379,513 4,035,000
Deferred income tax liabilities 284,947 915,276
------------ -----------
Total current liabilities 14,505,429 8,195,461
------------ -----------
STOCKHOLDERS' EQUITY:
Class A common stock, no par value - authorized, 750,000 shares;
issued and outstanding 471,388 and 466,388 shares at
December 31, 1997 and 1996, respectively - -
Class B non-voting common stock, no par value -
authorized, 750,000 shares; issued and outstanding,
435,843 and 405,773 shares at
December 31, 1997 and 1996, respectively - -
Additional paid-in capital 1,028,172 629,108
Retained earnings 1,118,629 3,058,660
------------ -----------
Total stockholders' equity 2,146,801 3,687,768
------------ -----------
TOTAL $ 16,652,230 $11,883,219
============ ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
c.w. COSTELLO & ASSOCIATES, inc.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET FEES $ 70,174,617 $ 42,557,333 $25,427,978
COST OF FEES:
Salaries, wages and
employee benefits 49,278,577 27,555,446 15,054,431
Contractual services 1,947,200 1,027,779 1,020,051
Project travel and
relocation 2,127,957 1,518,337 1,079,609
------------ ------------ -----------
Total cost of fees 53,353,734 30,101,562 17,154,091
------------ ------------ -----------
Gross profit 16,820,883 12,455,771 8,273,887
GENERAL AND ADMINISTRATIVE EXPENSES 17,854,885 11,264,018 6,714,670
------------ ------------ -----------
(LOSS) INCOME FROM OPERATIONS (1,034,002) 1,191,753 1,559,217
OTHER INCOME (EXPENSE):
Interest expense (815,041) (197,738) (52,229)
Other income (expense) 29,473 63,404 (9,495)
------------ ------------ -----------
(LOSS) INCOME BEFORE INCOME TAXES (1,819,570) 1,057,419 1,497,493
INCOME TAXES 120,461 86,099 128,566
------------ ------------ -----------
NET (LOSS) INCOME $ (1,940,031) $ 971,320 $1,368,927
============ ============ ===========
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE:
BASIC (LOSS) EARNINGS PER COMMON SHARE $ (2.18) $ 1.15 $ 1.97
============ ============ ===========
DILUTED (LOSS) EARNINGS PER COMMON SHARE $ (2.18) $ 1.12 $ 1.92
============ ============ ===========
BASIC WEIGHTED - AVERAGE SHARES OUTSTANDING 889,246 843,872 714,493
DILUTIVE EFFECT OF STOCK OPTIONS - 22,920 18,000
------------ ------------ -----------
DILUTED WEIGHTED - AVERAGE SHARES OUTSTANDING 889,246 866,792 732,493
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
c.w. COSTELLO & ASSOCIATES, inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
-------------- -------------- ADDITIONAL TOTAL
NUMBER OF CLASS A NUMBER OF CLASS B PAID-IN RETAINED STOCKHOLDERS'
SHARES SHARES CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 165,025 149,839 $321,889 $1,090,073 $1,411,962
Stock issuance 12,500 6,000 121,430 - 121,430
Net income - - - 1,368,927 1,368,927
Stock split 177,525 155,839 - - -
10% stock dividend 35,505 31,168 - - -
Cash dividends - - - (371,660) (371,660)
-------- -------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 390,555 342,846 443,319 2,087,340 2,530,659
Stock issuance 15,000 10,000 185,789 - 185,789
Net income - - - 971,320 971,320
15% stock dividend 60,833 52,927 - - -
-------- -------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 466,388 405,773 $629,108 $3,058,660 $3,687,768
Stock issuance 5,000 30,070 399,064 - 399,064
Net loss - - - (1,940,031) (1,940,031)
-------- -------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 471,388 435,843 $1,028,172 $1,118,629 $2,146,801
======== ======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
c.w. COSTELLO & ASSOCIATES, inc.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,940,031) $ 971,320 $ 1,368,927
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 485,982 362,622 39,785
Depreciation and amortization 451,328 207,633 81,686
(Benefit) provision for deferred income taxes (630,329) 85,224 111,536
Loss on disposal of fixed assets 28,169 - -
Changes in assets and liabilities:
Increase in accounts receivable (3,888,487) (3,711,893) (2,470,996)
Decrease (increase) in
unbilled revenue 113,066 (1,002,213) -
(Increase) decrease in other
current assets (616,344) 152,906 (288,265)
(Decrease) increase in accounts
payable (331,796) 678,934 (85,367)
Increase (decrease) in other
accrued expenses 1,993,444 (125,322) 334,500
Increase in accrued payroll
and related expenses 5,934,136 1,028,639 218,847
---------- ----------- -----------
Net cash provided by (used in) operating activities 1,599,138 (1,352,150) (689,347)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,239,456) (904,696) (294,162)
Increase in receivables from related parties (106,665) (169,243) (131,941)
---------- ----------- -----------
Net cash used in investing activities (1,346,121) (1,073,939) (426,103)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment) proceeds notes payable line of credit - net (655,487) 2,405,164 1,169,836
Proceeds from issuance of stock 432,714 213,153 60,416
Repayment of long-term debt - - (291,667)
Dividends - - (371,660)
---------- ----------- -----------
Net cash provided by financing activities (222,773) 2,618,317 566,925
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 30,244 192,228 (548,525)
CASH, BEGINNING OF YEAR 194,058 1,830 550,355
---------- ----------- -----------
CASH, END OF YEAR $ 224,302 $ 194,058 $ 1,830
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 770,808 $ 197,738 $ 52,229
========== =========== ===========
Income taxes $ 20,790 $ 875 $ 17,030
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING TRANSACTIONS:
Stock subscription receivable $ - $ 33,650 $ 61,014
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
c.w. COSTELLO & ASSOCIATES, inc.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF BUSINESS
c.w. Costello & Associates, inc. (the "Company") (an "S" corporation)
is a provider of information technology (IT) services to large and mid-size
organizations principally in the midwestern, eastern and southeastern
United States. 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.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers all cash and short-term
investments, with an original maturity of three months or less, to be cash
equivalents.
DEPRECIATION AND AMORTIZATION - The cost of property and equipment is being
depreciated or amortized over the estimated useful lives of the assets,
using straight-line and accelerated methods.
REVENUE RECOGNITION - Revenue is generated from two types of contracts:
time and material and fixed price. Revenue generated from time and material
contracts is recognized based upon agreed hourly billing rates with
customers. Revenue generated from fixed price contracts is recognized
using the percentage-of-completion method based on total costs incurred to
date as a percentage of total projected costs. For fixed price contracts,
changes in job performance, job contracts and estimated profitability and
final contract settlements may result in revisions to cost and income, and
are recognized in the period in which the revisions are determined. The
allowance for doubtful accounts is based on prior years' experience and
management's analysis of possible bad debts. Deferred revenue of $201,325
and $105,600 are included in other accrued expenses at December 31, 1997
and 1996, respectively.
UNBILLED REVENUE - Unbilled revenue represents costs incurred and
related earnings not currently billable under the terms of the contract.
These amounts will be billed over a period of less than twelve months.
INCOME TAXES - The Company is an "S" corporation and therefore is not
subject to corporate Federal income tax. The Company is liable for
certain state income taxes. The Company follows the asset and liability
approach, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of other assets
and liabilities using current tax rates.
USE OF ESTIMATES IN FINANCIAL STATEMENTS - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make certain 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 stated amount of revenues and expenses during the reporting period.
Actual results could differ from these estimates. It is management's
opinion that any differences would not have a material adverse effect on
the financial position or results of operations of the Company.
STOCK-BASED COMPENSATION - The Company accounts for stock-based
compensation plans utilizing the provisions of Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees."
9
<PAGE> 10
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE - As of
December 31, 1997, the Company retroactively adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). Basic
(loss) earnings per share is computed by dividing the net (loss) income
(the numerator) by the weighted-average number of common shares outstanding
(the denominator) during the period. Diluted (loss) earnings per common
share is computed by increasing the denominator by the number of additional
common shares that would have been outstanding if dilutive potential
common shares had been issued.
RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
3. INCOME TAXES
As an "S" corporation the Company is currently subject to certain State
income taxes. Additionally, the Company is subject to certain Federal and
State income taxes related to its prior "C" corporation status. The
provision (benefit) for income taxes for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
State $ 180,790 $ 875 $ 17,030
Federal 570,000 - -
--------- -------- ---------
750,790 875 17,030
---------- -------- ---------
Deferred
State (60,329) 85,224 111,536
Federal (570,000) - -
---------- -------- ---------
(630,329) 85,224 111,536
---------- -------- ---------
Total provision $ 120,461 $ 86,099 $ 128,566
========== ======== =========
</TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory U.S. Federal income tax rate to (loss) income before taxes for the
years ended December 31 as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. Federal income tax (benefit) provision at
statutory rate $ (659,610) $ 359,522 $ 509,148
State income taxes 120,461 86,099 128,566
Federal adjustment due to qualification as an
S corporation 659,610 (359,522) (509,148)
---------- ---------- ---------
Total provision $ 120,461 $ 86,099 $ 128,566
========== ========== =========
</TABLE>
Deferred income tax assets and liabilities consists of the following as of
December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred assets due to:
Accrued liabilities $ 99,935 $ 140,207
Accrued wages 372,237 -
Net operating loss carryforwards 7,319 105,045
---------- -----------
Total deferred asset 479,491 245,252
---------- -----------
Deferred liabilities due to:
Built-in gains tax 24,066 594,066
Accounts receivable 678,452 550,546
Property and equipment 26,326 13,297
Other 35,594 2,619
---------- -----------
Total deferred liability 764,438 1,160,528
---------- -----------
Net deferred income tax liability $ 284,947 $ 915,276
========== ===========
</TABLE>
The Company has net operating loss carryforwards of $212,583 for State income
tax purposes at December 31, 1997 which expire on December 31, 2001.
10
<PAGE> 11
4. BORROWINGS
As of December 31, 1997, the Company has a line of credit with LaSalle
National Bank ("LaSalle"), which includes a base borrowing line of
$11,000,000 and a special advance of $1,500,000. The line expires on May 1,
2000, and the special advance is reduced through monthly amortization over a
24 month period which began on July 1, 1997. The fair value approximates the
carrying amount of the line of credit at December 31, 1997 as a result of
the variable interest rate. The line is secured by substantially all of the
Company's assets. The line bears interest at an annual rate equal to
LaSalle's prime rate which is 8.5% per annum at December 31, 1997. The
outstanding borrowings on the line of credit is $3,379,513 at December 31,
1997. The LaSalle line of credit agreement contains restrictive covenants.
The more significant of these covenants are certain tangible net worth
calculations, financial ratios and profitability calculations.
As of December 31, 1996 the Company had a line of credit with Fleet Bank
("Fleet") of $5,000,000. On May 13, 1997, the Company entered into the
aforementioned line of credit agreement with LaSalle and subsequently paid
off all outstanding borrowings under the line of credit agreement with
Fleet. The fair value approximated the carrying amount of the line of credit
at December 31, 1996 as a result of the variable interest rate. The line was
secured by substantially all of the Company's assets. The line bore interest
at an annual rate equal to the bank's prime rate. Fleet's prime rate was
8.25% per annum at December 31, 1996. The outstanding balance on the credit
line was $4,035,000 at December 31, 1996. The line of credit agreement
contained restrictive covenants. The more significant of these covenants
were certain financial ratios and tangible net worth calculations.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer equipment and software $1,613,918 $ 916,990
Furniture 819,022 483,263
Office equipment 221,150 138,615
Leasehold improvements 96,216 37,108
---------- ----------
Total property and equipment
at cost 2,750,306 1,575,976
Less accumulated depreciation (835,691) (421,330)
---------- ----------
Net property and equipment $1,914,615 $1,154,646
========== ==========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company conducts its corporate operations from facilities that are
leased under noncancelable operating leases that expire on various dates
through 2002.
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<PAGE> 12
The following is a schedule of future minimum rental payments required under
the above operating leases as of December 31, 1997:
YEAR ENDING
DECEMBER 31,
1998 $1,215,026
1999 1,159,182
2000 919,033
2001 670,321
2002 289,626
----------
$4,253,188
==========
Rent expense was approximately $1,427,000, $687,000 and $369,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company is involved with legal matters in the normal course of
business. Based on discussions with outside counsel, the Company's
management does not believe the outcome of these matters will have a
material adverse impact on the financial condition or results of operations
of the Company.
7. EMPLOYEE BENEFIT PLANS
The Company maintains a retirement savings plan covering substantially all
employees. Participants may make 401(k) tax-deferred contributions from
their pay. The Company's contribution to the plan is discretionary with no
401(k) employer matching contribution. During the years ended December 31,
1997, 1996 and 1995, the Company's profit-sharing contribution was
approximately $420,000, $369,000 and $270,000, respectively.
In 1994, the Company instituted a phantom stock plan as a long-term benefit
for key employees. Phantom shares of stock are purchased by the employee
for book value established at the date of the option issuance. Upon
termination of employment, such phantom shares are redeemed at the current
book value. The plan was terminated as of December 31, 1997,
when all shares were redeemed at book value. The Company recorded
compensation expense of $24,312 during the year ended December 31, 1997 in
conjunction with the termination of the plan. The Company recorded
compensation expense of $42,034 and $90,461 for the years ended December
31, 1996 and 1995, respectively, for the difference between the ending book
value per share and phantom shares' exercise price.
8. RELATED PARTY TRANSACTIONS
The Company leases real estate from an affiliate on a month-to-month basis.
During 1997, 1996 and 1995, the Company incurred rent expense of
$150,000, $102,000 and $36,000, respectively, for such leases. In
addition, the Company had notes receivable from and loans to related parties
at December 31, as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Loans to management - current $ 112,696 $ 142,674
Loans to employees - current 94,639 62,750
Notes receivable from c.w. Costello
Realty Group - current 28,106 27,785
---------- ----------
Receivables from related
parties - current $ 235,441 $ 233,209
========== ==========
Loans to management - net of current portion $ 6,801 $ -
Notes receivable from c.w. Costello
Realty Group - net of current portion 233,266 135,634
---------- ----------
Receivables from related
parties - net of current portion $ 240,067 $ 135,634
========== ==========
</TABLE>
12
<PAGE> 13
The Company had a notes receivable bearing interest at 8% from
an affiliate at December 31, 1997 and 1996, and has
guaranteed the related mortgage obligations for this affiliate of
approximately $270,000 as of December 31, 1997.
Interest income earned on notes receivable from related parties during
the years ended December 31, 1997, 1996 and 1995 was $3,461, $11,874 and
$4,415, respectively.
9. STOCKHOLDERS' EQUITY
On December 30, 1995, the Company declared a 2 for 1 stock split payable
to stockholders of record as of December 31, 1995. Additionally, the
Company declared 15% and 10% stock dividends on December 31, 1996 and
1995, respectively.
13
<PAGE> 14
The Company maintains a stock option plan available to certain employees.
Under the terms of the plan, options to purchase shares of the Company's
common stock are granted at a price equal to the fair market value of the
stock at the date of the grant. Following is a summary of option
transactions for all classes of stock for the years ending December 31:
<TABLE>
<CAPTION>
SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
UNDER AVERAGE UNDER AVERAGE UNDER AVERAGE
OPTION PRICE OPTION PRICE OPTION PRICE
1997 PER SHARE 1996 PER SHARE 1995 PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 63,800 $ 5.12 88,800 $ 5.39 17,900 $ 2.17
Granted during the year 17,500 $15.41 - $ - 45,000 $ 6.73
Cancelled during the
year (18,000) $ 1.10 - $ - - $ -
Exercised during the year (9,000) $ 5.49 (25,000) $ 6.08 (18,500) $ 5.54
------- ------ ------- ------ ------- ------
Outstanding prior
to split - - - - 44,400 $ 5.39
Effect of 2 for 1 stock
split - - - - 44,400 $ 5.39
------- ------ ------- ------ ------- ------
Outstanding, end
of year 54,300 $ 9.70 63,800 $ 5.12 88,800 $ 5.39
======= ====== ======= ====== ======= ======
Exercise prices of options
outstanding, end of year 1,000 $ 3.94 18,000 $ 1.10 18,000 $ 1.10
800 $ 4.76 800 $ 4.76 5,000 $ 3.46
40,000 $ 6.73 45,000 $ 6.73 800 $ 4.76
12,500 $20.00 65,000 $ 6.73
Weighted Average
remaining life of
outstanding grants (years) 8.27 8.05 9.16
Exercisable, end of year 48,800 $ 4.62 33,600 $ 3.67 23,400 $ 3.57
======= ======= =======
Weighted average fair value
of options granted during
the year 17,500 $17.55 - - 45,000 $ 6.73
======= ======= =======
</TABLE>
The Company has determined that the pro forma disclosure effect on compensation
expense required by SFAS No. 123, "Accounting for Stock-Based Compensation," is
approximately $211,000 net of income tax effect for the year ended December 31,
1997 and is immaterial for the years ended December 31, 1996 and 1995. Had the
unrecorded compensation expense for the options been recorded during the year
ended December 31, 1997, the Company's pro forma net loss and pro forma net
loss per common share would have been increased as follows:
Pro forma net loss:
As Reported $(1,940,031)
SFAS No. 123 pro forma $(2,151,031)
Pro forma net loss per common share
As Reported $(2.18)
SFAS No. 123 pro forma $(2.42)
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
1997 and 1995 grants: risk-free interest rate of 6.34% and 6.20%, respectively;
volatility of 45% and 0%, respectively, dividend yield of 0%; and expected lives
of 10 years.
10. SUBSEQUENT EVENTS
On January 13, 1998, the Company made loans to certain officers in the amount
of $303,900.
On January 27, 1998, the Company merged with Complete Business Solutions, Inc.
In conjunction with the merger, the Company paid off its line of credit (see
note 4) and terminated its 401(k) Plan (see note 7).
14
<PAGE> 15
(b) Forma Financial Information
On January 7, 1998 Complete Business Solutions, Inc. and subsidiaries (CBSI)
announced that it had reached an agreement to merge with c.w. Costello &
Associates, inc. (Costello), a privately held Delaware corporation.
On January 27, 1998, CBSI signed an Agreement and Plan of Merger (Merger
Agreement) with Costello, and with the holders of "A" the issued and
outstanding common stock of Costello.
The Merger Agreement, as adjusted for CBSI's March 19, 1998 stock
dividend, provided that all of the outstanding Costello common stock
to be exchanged for 3,363,090 shares of CBSI's common stock. In negotiating
the purchase price, CBSI considered the current market value of its common
stock, Costello's reputation as a premier provider of IT services to large and
mid-sized corporations, the minimal overlap of Costello's and CBSI's clients,
the broad range of IT services provided by Costello, Costello's 750 IT
professionals and the opportunity to improve Costello's margins.
The unaudited condensed pro forma combined balance sheet as of December 31,
1997 gives pro forma effect to the merger with Costello as if it had
occurred on December 31, 1997. The merger with Costello will be accounted
for by the pooling of interests method of accounting. The unaudited condensed
pro forma combined balance sheet does not purport to be indicative of the
financial position of CBSI had such transaction actually been completed as of
December 31, 1997, or which may be obtained in the future.
The unaudited condensed pro forma combined statements of operations for the
years ended December 31, 1997, 1996 and 1995, give pro forma effect to CBSI's
initial public offering, the additional provision for federal and state income
taxes at the effective rate as if CBSI's and Costello's subchapter S elections
had been revoked, and the merger with Costello as if they had occurred on
the first day of each period presented. The unaudited condensed pro forma
combined statements of income do not purport to be indicative of the results of
operations of CBSI had such transactions actually been completed on the first
day of each period presented, or which may be obtained in the future.
15
<PAGE> 16
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
This balance sheet should be read in conjunction with the Costello historical
financial statements and notes thereto included in this Form 8-K/A, and the
CBSI historical financial statements included in its Annual Report on Form
10-K for the year ended December 31, 1997, which will be filed on or about
March 30, 1998. All amounts are in thousands.
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
CBSI COSTELLO COMBINED
ASSETS ----------------- ------------------ ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ....................... $57,234 $ 224 $57,458
Accounts receivable, net ....................... 25,175 13,399 38,574
Deferred tax asset............................... 2,131 - 2,131
Prepaid expenses and other ...................... 1,168 638 1,806
Receivables from related
parties - current ............................. - 236 236
------- ------ --------
Total current assets ......................... 85,708 14,497 100,205
------- ------ --------
Property and equipment, net ....................... 6,456 1,915 8,371
Goodwill, net ..................................... 2,809 - 2,809
Other assets ...................................... 759 - 759
Receivables from related
parties - net of current portion ............... - 240 240
------- ------ --------
Total assets ................................ $95,732 $16,652 $112,384
======= ====== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 3,766 $ 604 $4,370
Notes payable ................................... - 3,380 3,380
Accured payroll and related costs ............... 7,945 7,685 15,630
Deferred revenue................................. 874 201 1,075
Distribution payable to shareholders............. 1,325 - 1,325
Other accrued liabilities ....................... 3,858 2,635 6,493
------- ------ --------
Total current liabilities ................... 17,768 14,505 32,273
------- ------ --------
Other liabilities.................................. 190 - 190
Commitments and contingencies
Shareholders' equity:
Preferred stock ................................... - - -
Common stock ...................................... - - -
Additional paid-in capital ........................ 74,300 1,028 75,328
Retained earnings ................................. 6,660 1,119 7,779
Stock subscriptions receivable .................... (2,503) - (2,503)
Cumulative translation adjustment ................. (683) - (683)
------- ------ --------
Total shareholders' equity .................. 77,774 2,147 79,921
------- ------ --------
Total liabilities and shareholders' equity .. $95,732 $16,652 $112,384
======= ====== ========
</TABLE>
16
<PAGE> 17
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
This statement should be read in conjunction with the Costello historical
financial statements and notes thereto included in this Form 8-K/A, and the CBSI
historical financial statements included in its Annual Report on Form 10-K
for the year ended December 31, 1997, which will be filed on or about March 30,
1998. All amounts are in thousands, except per share amounts.
<TABLE>
<CAPTION>
MERGER
HISTORICAL PRO FORMA HISTORICAL PRO FORMA PRO FORMA
CBSI ADJUSTMENTS(1) COSTELLO ADJUSTMENTS(1) COMBINED
----------------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ 72,658 $ - $ 25,428 $ - $ 98,086
Cost of revenues
Salaries, wages and employee benefits .......... 49,032 - 15,054 - 64,086
Contractual services ........................... 3,689 - 1,020 - 4,709
Project travel and relocation .................. 3,258 - 1,080 - 4,338
Depreciation and amortization .................. 1,178 - - - 1,178
-------- -------- -------- -------- --------
Total cost of revenues ...................... 57,157 - 17,154 - 74,311
-------- -------- -------- -------- --------
Gross profit ................................ 15,501 - 8,274 - 23,775
Selling general and administrative expenses ...... 12,858 147 6,715 - 19,720
-------- -------- -------- -------- --------
Income from operations ...................... 2,643 (147) 1,559 - 4,055
Interest expense (income) ........................ 676 (724) 62 - 14
-------- -------- -------- -------- --------
Income before provision for income taxes
and minority interest..................... 1,967 577 1,497 - 4,041
Provision for income taxes(1)..................... 10 653 128 524 1,315
Minority interest ................................ $ 252 (252) - - -
-------- -------- -------- -------- --------
Net income ................................. $ 1,705 $ 176 $ 1,369 $ (524) $ 2,726
======== ======== ======== ======== ========
Net income per common share ...................... $ 0.10 $ 0.14
======== ========
Weighted average shares outstanding (3) .......... 16,368 20,083
======== ========
</TABLE>
17
<PAGE> 18
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
This statement should be read in conjunction with the Costello historical
financial statements and notes thereto included in this Form 8-K/A, and the CBSI
historical financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 1997, which will be filed on or about March 30,
1998. All amounts are in thousands, except per share amounts.
<TABLE>
<CAPTION>
MERGER
HISTORICAL PRO FORMA HISTORICAL PRO FORMA PRO FORMA
CBSI ADJUSTMENTS(1) COSTELLO ADJUSTMENTS(1) COMBINED
---------------- ----------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 92,750 $ - $ 42,557 $ - $ 135,307
Cost of revenues:
Salaries, wages and employee benefits.......... 58,032 - 27,555 - 85,587
Contractual services........................... 6,626 - 1,028 - 7,654
Project travel and relocation.................. 3,638 - 1,518 - 5,156
Depreciation and amortization.................. 1,453 - - - 1,453
--------- -------- -------- ------ ---------
Total cost of revenues....................... 69,749 - 30,101 - 99,850
--------- -------- -------- ------ ---------
Gross profit................................. 23,001 - 12,456 - 35,457
Selling, general and administrative expenses..... 16,930 147 11,264 - 28,341
--------- -------- -------- ------ ---------
Income from operations....................... 6,071 (147) 1,192 - 7,116
Interest expense (income)........................ 520 (610) 135 - 45
Equity in loss of investee....................... 110 - - - 110
--------- -------- -------- ------ ---------
Income before provision for income taxes and
minority interest......................... 5,441 463 1,057 - 6,961
Provision for income taxes(1).................... 108 2,031 86 370 2,595
Minority interest................................ 158 (158) - - -
--------- -------- -------- ------ ---------
Net income................................... $ 5,175 $ (1,410) $ 971 $ (370) $ 4,366
========= ======== ======== ====== =========
Net income per common share...................... $ 0.31 $ 0.21
========== =========
Weighted average shares outstanding(3)........... 16,906 21,009
========= =========
</TABLE>
18
<PAGE> 19
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
This statement should be read in conjunction with the Costello historical
financial statements and notes thereto included in this Form 8-K/A, and the CBSI
historical financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 1997, which will be filed on or about March 30,
1998. All amounts are in thousands, except per share amounts.
<TABLE>
<CAPTION>
MERGER
HISTORICAL PRO FORMA HISTORICAL PRO FORMA PRO FORMA
CBSI ADJUSTMENTS(1) COSTELLO ADJUSTMENTS(1) COMBINED
-------------- ----------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ............................................ $123,775 $ - $70,175 $ - $193,950
Cost of revenues:
Salaries, wages and employee benefits ............. 68,577 - 49,279 - 117,856
Contractual services .............................. 13,939 - 1,947 - 15,886
Project travel and relocation ..................... 5,910 - 2,128 - 8,038
Depreciation and amoritization .................... 1,174 - - - 1,174
-------- -------- ------- ------- -------
Total cost of revenues ...................... 89,600 - 53,354 - 142,954
-------- -------- ------- ------- -------
Gross profit ................................ 34,175 - 16,821 - 50,996
Selling, general and administrative expenses ........ 22,530 24 17,855 - 40,409
Merger costs......................................... 1,203 - - - 1,203
-------- -------- ------- ------- -------
Income (loss) from operations ............... 10,442 (24) (1,034) - 9,384
Interest expense (income) ........................... (1,506) (53) 786 - (773)
Equity in loss of investee .......................... 251 - - - 251
-------- -------- ------- ------- -------
Income (loss) before provision for income taxes
and minority interest ................. 11,697 29 (1,820) - 9,906
Provision for income taxes(1)........................ 4,114 (89) 120 (655) 3,490
Minority interest ................................... 82 (82) - - -
-------- -------- ------- ------- -------
Net income .................................. $ 7,501 $ 200 $(1,940) $ 655 $ 6,416
======== ======== ======= ======= =======
Net income per common share ......................... $ 0.35 $ 0.26
======== =======
Weighted average shares outstanding (3) ............. 21,564 24,727
======== =======
</TABLE>
19
<PAGE> 20
NOTE 1. On March 5, 1997, CBSI 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 CBSI from this offering were used for payment of
undistributed S corporation earnings; the repayment of existing debt;
expansion of existing operations, including CBSI's offshore software
development operations; development of new service lines and possible
acquisitions and mergers of related businesses; and general corporate purposes,
including working capital.
The unaudited condensed pro forma combined statements of operations
included in this Form 8-K/A give effect to the following transactions as if
such transactions had occurred on the first day of each period presented:
(i) amortization of goodwill over a period of 20 years as a
result of CBSI'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 CBSI's revolving credit facility and long-term debt;
(iii) provision for Federal and state income taxes at the
effective income tax rate as if CBSI and Costello had been taxed as a C
corporation and no foreign tax holidays had been granted during the periods
presented.
NOTE 2. The unaudited condensed pro forma combined balance sheet and
statements of operations have been prepared to reflect the merger with
Costello. The merger with Costello will be accounted for by the pooling
of interests method of accounting. All amounts are in thousands, except per
share amounts.
NOTE 3. Weighted average shares outstanding have been adjusted to give pro
forma effect to the initial public offering of the Company and the merger with
Costello as if they had occurred on the first day of each period presented.
20
<PAGE> 21
(c) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Complete Business Solutions, Inc.
By: /s/ Timothy S. Manney
-------------------------
Timothy S. Manney
Executive Vice President for Finance and Administration
Date: March 23, 1998
<PAGE> 22
COMPLETE BUSINESS SOLUTIONS, INC.
EXHIBIT INDEX
Number and Description
of Exhibit
23.1 Consent of Deloitte & Touche, LLP
<PAGE> 1
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-36701 of Complete Business Solutions, Inc. on Form S-4 of our report dated
February 9, 1998 appearing in this Form 8-K/A relating to our audits of the
financial statements for the years ended December 31, 1997, 1996 and 1995 of
c.w. Costello & Associates, inc.
DELOITTE & TOUCHE
Hartford, Connecticut
March 23, 1998