<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22141
COMPLETE BUSINESS SOLUTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2606945
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
32605 WEST TWELVE MILE ROAD
SUITE 250
FARMINGTON HILLS, MICHIGAN 48334
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (248) 488-2088
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NO PAR VALUE 37,472,690
(Class of Common Stock) (Outstanding as of May 12, 1999)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
COMPLETE BUSINESS SOLUTIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Income................. 4
Condensed Consolidated Statements of Cash Flows............. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 9
Item 6. Exhibits and Reports on Form 8-K............................ 9
SIGNATURES............................................................. 10
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $104,826 $ 60,732
Accounts receivable, net.................................. 89,232 72,007
Revenue earned in excess of billings, net................. 12,511 11,597
Prepaid expenses and other................................ 5,657 3,311
-------- --------
Total current assets................................... 212,226 147,647
-------- --------
Property and equipment, net................................. 19,975 17,846
Goodwill, net............................................... 16,928 10,383
Other assets................................................ 9,158 6,710
-------- --------
Total assets........................................... $258,287 $182,586
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,259 $ 6,113
Accrued payroll and related costs......................... 26,518 26,479
Deferred revenue.......................................... 1,224 1,703
Other accrued liabilities................................. 5,941 5,520
-------- --------
Total current liabilities.............................. 38,942 39,815
-------- --------
Other liabilities........................................... 294 1,616
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued................................ -- --
Common stock, no par value, 200,000,000 shares authorized,
37,337,835 and 34,862,642 shares issued and outstanding
as of March 31, 1999 and December 31, 1998,
respectively........................................... -- --
Additional paid-in capital................................ 182,183 117,590
Retained earnings......................................... 41,147 30,912
Stock subscriptions receivable............................ (3,116) (6,079)
Cumulative translation adjustment......................... (1,163) (1,268)
-------- --------
Total shareholders' equity............................. 219,051 141,155
-------- --------
Total liabilities and shareholders' equity............. $258,287 $182,586
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE> 4
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $112,027 $83,161
Cost of revenues:
Salaries, wages and employee benefits..................... 59,837 43,654
Contractual services...................................... 7,723 7,311
Project travel and relocation............................. 4,770 3,926
Depreciation and amortization............................. 896 1,075
-------- -------
Total cost of revenues............................ 73,226 55,966
-------- -------
Gross profit...................................... 38,801 27,195
Selling, general and administrative expenses................ 24,231 20,383
Merger costs and other...................................... -- 10,960
-------- -------
Income (loss) from operations..................... 14,570 (4,148)
Other expense (income)...................................... (1,040) (559)
-------- -------
Income (loss) before provision for income taxes
and minority interest........................... 15,610 (3,589)
Provision for income taxes.................................. 5,375 3,048
-------- -------
Net income (loss)................................. 10,235 (6,637)
======== =======
Basic earnings (loss) per share --
Weighted-average shares outstanding....................... 36,363 33,641
======== =======
Basic earnings (loss) per share........................... $ 0.28 $ (0.20)
======== =======
Diluted earnings (loss) per share --
Weighted-average shares outstanding....................... 36,363 33,641
Diluted effect of stock options........................... 1,593 --
-------- -------
Diluted weighted average shares outstanding............... 37,956 33,641
======== =======
Diluted earnings (loss) per share......................... $ 0.27 $ (0.20)
======== =======
Pro Forma Information:
Net income (loss) as reported............................... $ 10,235 $(6,637)
Pro forma incremental income tax benefit.................... -- (1,417)
-------- -------
Pro forma net income (loss)................................. $ 10,235 $(5,220)
======== =======
Earnings (loss) per share --
Pro forma basic earnings (loss) per share................. $ 0.28 $ (0.16)
======== =======
Pro forma diluted earnings (loss) per share............... $ 0.27 $ (0.16)
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 10,235 $(6,637)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 2,514 2,117
Provision for doubtful accounts........................ 322 297
Writedown of other assets and other.................... -- 5,915
Change in assets and liabilities --
Accounts receivable.................................... (17,871) (2,273)
Prepaid expenses and other assets...................... (3,202) (513)
Accounts payable, accrued payroll and related costs and
other liabilities..................................... (2,865) 4,861
Deferred revenue....................................... (1,801) 1,107
-------- -------
Net cash provided by (used in) operating
activities...................................... (12,668) 4,874
-------- -------
Cash flows from investing activities:
Investment in property, equipment and other............... (3,655) (2,877)
Investment in computer software........................... (1,828) (794)
Payment for purchase of assets, net of cash acquired...... (3,593) --
-------- -------
Net cash used in investing activities............. (9,076) (3,671)
-------- -------
Cash flows from financing activities:
Net payments on revolving credit facility and long-term
debt................................................... -- (3,634)
Net proceeds from issuance of common stock................ 62,752 269
Net proceeds from exercise of stock options and other..... 3,085 487
-------- -------
Net cash provided by (used in) financing
activities...................................... 65,837 (2,878)
-------- -------
Effect of exchange rate changes on cash..................... 1 9
-------- -------
Increase (decrease) in cash and cash equivalents............ 44,094 (1,666)
-------- -------
Cash and cash equivalents at beginning of period............ 60,732 61,861
-------- -------
Cash and cash equivalents at end of period.................. $104,826 $60,195
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ -- $ 104
Income taxes........................................... $ 6,596 $ 1,877
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by management, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position of Complete Business Solutions, Inc. and
subsidiaries (CBSI) as of March 31, 1999, the results of its operations for the
three month periods ended March 31, 1999 and 1998, and cash flows for the three
month periods ended March 31, 1999 and 1998. These financial statements should
be read in conjunction with the consolidated financial statements and footnotes
thereto included in CBSI's 1998 Form 10-K.
The results of operations for the three month period ended March 31, 1999
are not necessarily indicative of the results to be expected in future quarters
or for the full fiscal year ending December 31, 1999.
2. COMMON STOCK OFFERING
In February 1999, CBSI completed a secondary offering of 5,400,000 shares
of its Common Stock at a price of $31.00 per share. This offering consisted of
2,135,000 shares of newly issued Common Stock and 3,265,000 shares sold by
selling shareholders. After underwriting discounts, commissions and other
issuance costs, net proceeds to CBSI from the sale of newly issued shares in
this offering were approximately $60 million.
3. INCOME TAXES
In January 1998, CBSI merged with c.w. Costello & Associates, inc.
(Costello), an S corporation. As a result of the merger, the S corporation
status was terminated thereby subjecting future income of Costello to federal
and state income taxes at the corporate level. Accordingly, the application of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109) resulted in the recognition of deferred tax assets and
liabilities, and a corresponding charge to the provision for income taxes of
approximately $1,400 during the three month period ended March 31, 1998.
CBSI has provided federal and state income taxes in the condensed
consolidated statements of income based on the anticipated effective tax rate
for fiscal years 1999 and 1998.
4. SUBSEQUENT EVENT -- ACQUISITION
In April 1999, CBSI closed an agreement to acquire the commercial division
of Impact Innovations Group, an operating unit of Medaphis Corporation, for
approximately $15,000. The acquisition will be accounted for in CBSI's second
quarter as a purchase.
5. SUBSEQUENT EVENT -- SETTLEMENT OF THIRD-PARTY COMPLAINT
On April 28, 1998, CBSI signed a Mutual Settlement and Release Agreement
(the "Agreement") with Network Six, Inc. ("NSI") to settle all claims relating
to the litigation between CBSI and NSI in the Superior Court for the State of
Rhode Island and the Circuit Court for the State of Hawaii arising from a
software development project for the State of Hawaii. The settlement does not
have a material effect on CBSI's financial condition, results of operations or
cash flows.
6
<PAGE> 7
ITEM 2. 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 should be read in conjunction with CBSI's condensed
consolidated financial statements and notes thereto included in this Form 10-Q.
With the exception of statements regarding historical matters and statements
concerning our current status, certain matters discussed in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements which involve substantial risks and uncertainties.
Forward-looking statements can be identified by the words "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions. Our actual
results, performance or achievements could differ materially from these
forward-looking statements. Factors that could cause or contribute to such
material differences include our failure to recruit and retain IT professionals,
risks related to our merger and acquisition strategy, variability of our
operating results, governmental regulation of immigration, potential costs
overruns on fixed-price projects, increasing significance of non-U.S.
operations, decreasing demand for Year 2000 services, exposure to regulatory,
political and economic conditions in India, competition in the IT services
industry and other risks as more fully discussed in our 1998 Form 10-K.
RESULTS OF OPERATIONS
Revenues. CBSI's revenues increased approximately 34.7% to $112 million for
the three month period ended March 31, 1999 from $83.2 million for the same
period in 1998. This growth in revenues is primarily attributable to increases
in CBSI's IT professional workforce, increases in average billing rates and
additional services provided to existing clients. CBSI's IT professional
workforce increased approximately 20% for the three month period ended March 31,
1999 from the comparable three month period in 1998. Revenues from existing
clients increased $12.1 million for the three month period ended March 31, 1999
over the same period in 1998.
Gross Profit. Gross profit consists of revenues less cost of revenues. Cost
of revenues consists primarily of salaries (including nonbillable and training
time), benefits, travel and relocation for IT professionals. In addition, cost
of revenues includes depreciation and amortization, direct facility costs and
contractual services. Gross profit increased approximately 42.7% to $38.8
million for the three month period ended March 31, 1999 from $27.2 million for
the same period in 1998. This increase is primarily attributable to increases in
CBSI's IT professional workforce and average U.S. billing rates. Gross profit as
a percentage of revenues increased to approximately 34.6% for the three month
period ended March 31, 1999 from approximately 32.7% for the same period in
1998. This increase in gross profit margin as a percentage is primarily
attributable to CBSI's continued strategic shift of its business toward higher
margin service offerings. For the three month period ended March 31, 1999,
approximately 6% of revenues were generated from contract programming services,
as compared with approximately 13% for the three month period ended March 31,
1998.
Selling, General and Administrative. Selling, general and administrative
expenses consists primarily of costs associated with CBSI's direct selling and
marketing efforts, human resources and recruiting departments, administration
and indirect facility costs. Selling, general and administrative increased
approximately 18.9% to $24.2 million for the three month period ended March 31,
1999 from $20.4 million for the same period in 1998. This increase resulted from
the continued expansion of CBSI's direct selling and marketing effort, further
enhancement of the infrastructure, and other general overhead cost increases
necessary to support CBSI's continued revenue growth. As a percentage of
revenues, selling, general and administrative expenses decreased to 21.6% for
the three month period ended March 31, 1999 from 24.5% for the same period in
1998 as CBSI continued to leverage its existing infrastructure.
Other Expense (Income). Other expense (income) represents interest earned
on cash equivalents, net of interest expense on borrowings. Other income for the
three month period ended March 31, 1999 was $1.0 million, as compared to $0.6
million for the three month period ended March 31, 1998. This change is
primarily due to reduced interest expense, resulting from the repayment of
Costello's and Claremont's debt in 1998 and interest earned from the investment
of net proceeds from CBSI's public offerings of Common Stock.
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
CBSI generally funds its operations and working capital needs through
internally generated funds, periodically supplemented by borrowings under CBSI's
revolving credit facilities with commercial banks. CBSI's cash used in
operations was $12.7 million for the three month period ended March 31, 1999
compared to cash provided by operations of $4.9 million for the three month
period ended March 31, 1998. The decrease in cash provided by operations is
primarily due to payment of amounts accrued in fiscal 1998, principally employee
bonuses, and an increase in the accounts receivable days sales outstanding
during the three month period ended March 31, 1999 as compared to the same
period in 1998.
The principal use of cash for investing activities during the three month
periods ended March 31, 1999 and 1998 was for the purchase of property and
equipment primarily as part of the development and enhancement of CBSI's
offshore software development centers and the investment in computer software.
Historically, borrowings and repayments under CBSI's revolving credit
facilities represented the most significant components of cash provided or used
by financing activities. Under an arrangement with a commercial bank, CBSI may
borrow an amount not to exceed $21 million with interest at the bank's prime
interest rate, or the LIBOR rate plus 1 1/4%. Borrowings under this facility are
short-term, payable on demand and are secured by trade accounts receivable and
equipment of CBSI. Net cash provided by financing activities for the three month
period ended March 31, 1999 of $65,837 was primarily due to CBSI realizing net
proceeds of approximately $60 million from the issuance of common stock in
February 1999 during this follow-on offering.
The offshore development centers' operations of CBSI accounted for
approximately 10% of CBSI's total revenues during the three month period ended
March 31, 1999. Most of the CBSI's revenues are billed in U.S. dollars. CBSI
recognizes transaction gains and losses in the period of occurrence. Foreign
currency fluctuations during the three month period ended March 31, 1999 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. CBSI 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 CBSI's revenues or income from
operations during the three month period ended March 31, 1999.
CBSI has evaluated its primary information technology infrastructure for
Year 2000 compliance. CBSI does not expect that the cost to modify its primary
information technology infrastructure to be Year 2000 compliant will be material
to its financial condition or results of operations. CBSI does not anticipate
any material disruption in its operations as a result of any failure to be in
compliance. CBSI does not currently have any information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
CBSI's significant suppliers, including providers of electricity, gas, water,
communication and telephone services, or customers do not successfully and
timely achieve Year 2000 compliance, CBSI's business or operations may be
adversely affected.
8
<PAGE> 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 1998, CBSI signed a Mutual Settlement and Release Agreement
(the "Agreement") with Network Six, Inc. ("NSI") to settle all claims relating
to the litigation between CBSI and NSI in the Superior Court for the State of
Rhode Island and the Circuit Court for the State of Hawaii arising from a
software development project for the State of Hawaii. The settlement does not
have a material effect on CBSI's financial condition, results of operations or
cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
(11) Computation of Earnings per share
(27) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On January 20, 1999, CBSI filed a Form 8-K reporting Other Events as
required by Item 5 of Form 8-K.
9
<PAGE> 10
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 thereunto duly authorized.
COMPLETE BUSINESS SOLUTIONS, INC.
By: /s/ RAJENDRA B. VATTIKUTI
------------------------------------
Rajendra B. Vattikuti
President and Chief Executive
Officer
/s/ TIMOTHY S. MANNEY
------------------------------------
Timothy S. Manney
Executive Vice President of Finance
and
Administration, Treasurer and
Director
(Principal Financial and
Accounting Officer)
Dated: May 15, 1999
10
<PAGE> 11
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
COMPLETE BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
PRO FORMA OR ACTUAL NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Weighted average number of shares of Common Stock
outstanding.................................................. 36,363 33,641
Common Stock equivalents calculated using the weighted
average stock price per share for the periods presented...... 1,593 --
------- -------
Weighted average shares outstanding............................ 37,956 33,641
======= =======
Pro forma net income (loss).................................... 10,235 (5,220)
======= =======
Pro forma net income (loss) per common share................... 0.27 (0.16)
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 104,826
<SECURITIES> 0
<RECEIVABLES> 89,232
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 212,226
<PP&E> 19,975
<DEPRECIATION> 0
<TOTAL-ASSETS> 258,287
<CURRENT-LIABILITIES> 38,942
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 219,051
<TOTAL-LIABILITY-AND-EQUITY> 258,287
<SALES> 0
<TOTAL-REVENUES> 112,027
<CGS> 0
<TOTAL-COSTS> 73,226
<OTHER-EXPENSES> 24,231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,040)
<INCOME-PRETAX> 15,610
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,235
<EPS-PRIMARY> 0
<EPS-DILUTED> .27
</TABLE>
