FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the quarterly period ended September 30, 1999

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the transition period from                            to                            

Commission file number: 0-22141

Michigan

32605 West Twelve Mile Road

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

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INDEX

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated balance sheets.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 1999, the results of its operations for the three and nine month periods ended September 30, 1999 and 1998, and cash flows for the nine month periods ended September 30, 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 September 30, 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. Shareholders’ Equity

      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 $60,000.

  Common Stock Repurchase

      In August 1999, CBSI announced a plan to repurchase up to 2,000,000 shares of its Common Stock from time to time over a 24 month period. During the quarter ended September 30, 1999, CBSI repurchased 240,000 shares of its Common Stock for $3,536.

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 benefit to the provision for income taxes of approximately $1,400 during the nine month period ended September 30, 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.

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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, increasing cost of IT professional workforce, 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 Annual Report on Form 10-K.

Results of Operations

      Revenues.  CBSI’s revenues increased approximately 20.8% to $119.2 million for the three month period ended September 30, 1999 from $98.7 million for the same period in 1998. Revenue increased approximately 28.7% to $350.9 million for the nine month period ended September 30, 1999 from $272.6 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. The completion of Y2K projects and the Y2K-induced industry slowdown has and will continue to temporarily decrease our growth rate and margins as we transition our offshore services to high-margin services. CBSI’s IT professional workforce increased approximately 17% and 19% for the three and nine month periods ended September 30, 1999 from the comparable three and nine month periods in 1998. For the quarter ended September 30, 1999, approximately 86% of CBSI’s revenues were generated from existing clients.

      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 12.5% to $38.3 million for the three month period ended September 30, 1999 from $34.1 million for the same period in 1998, and approximately 28.8% to $118.6 million for the nine month period ended September 30, 1999 from $92 million for the same period in 1998. These increases are primarily attributable to increases in CBSI’s U.S. IT professional workforce and average U.S. billing rates. Gross profit as a percentage of revenues decreased to 32.1% for the three month period ended September 30, 1999 from approximately 34.5% for the same period in 1998. This decrease in gross profit as a percentage of revenue is primarily attributable to a decrease in offshore utilization resulting from the continuing transition from Year 2000 related services to Emerging Technology services, including E-business services. For the nine month periods ended September 30, 1999 and 1998, gross profit as a percentage of revenue was 33.8%.

      Selling, General and Administrative.  Selling, general and administrative expenses consist 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 expenses increased approximately 18.5% to $25.8 million for the three month period ended September 30, 1999 from $21.8 million for the same period in 1998 and approximately 20.9% to $76.1 million for the nine month period ended September 30, 1999 from $62.9 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% and 21.7% for the three and nine month periods ended September 30, 1999, respectively, from 22.1% and 23.1% for the same periods in 1998 as CBSI continued to leverage its existing infrastructure.

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      Interest Income.  Interest income represents interest earned on cash equivalents, net of interest expense on borrowings. Other income was $787 thousand for the three month period ended September 30, 1999 as compared to $821 thousand for the same period in 1998.

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 $10.5 million for the nine month period ended September 30, 1999 compared to cash provided by operations of $14.4 million for the nine month period ended September 30, 1998. The decrease in cash provided by operations is primarily due to the payment of amounts accrued in fiscal 1998 and acquisition costs, and an increase in the accounts receivable days sales outstanding during the nine month period ended September 30, 1999 as compared to the same period in 1998.

      The principal use of cash for investing activities during the nine month period ended September 30, 1999 was for the purchase of assets in connection with CBSI’s acquisition of Impact Innovations Group, the purchase of property and equipment primarily as part of the 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 nine month period ended September 30, 1999 of $64.5 million was primarily due to CBSI realizing net proceeds of approximately $60 million from the issuance of common stock in February 1999 during the secondary common stock offering.

      The offshore development centers’ operations of CBSI accounted for approximately 6% of CBSI’s total revenues during the three month period ended September 30, 1999. Most of 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 nine month period ended September 30, 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 nine month period ended September 30, 1999.

      CBSI has evaluated its primary information technology infrastructure for Year 2000 compliance. CBSI has upgraded its critical systems to become Year 2000 compliant. CBSI does not anticipate any material disruption in its operations as a result of any failure to be in compliance. CBSI has received information from its critical suppliers and vendors, indicating that they do not anticipate any disruption in services or supplies to CBSI as a result of the Year 2000 compliance matters. In the event that any of CBSI’s significant suppliers or vendors, 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.

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PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

(b)  Reports on Form 8-K

      On July 7, 1999, CBSI filed a Form 8-K/A with the Securities and Exchange Commission amending and restating Item 7 of its report on Form 8-K dated April 20, 1999.

      On August 19, 1999, CBSI filed a Form 8-K with the Securities and Exchange Commission announcing that its Board of Directors had approved a plan to repurchase up to 2,000,000 shares of its Common Stock from time to time over a 24 month period. In addition, the CBSI Board of Directors accepted the resignation of Jerry L. Stone and Charles W. Costello from CBSI’s Board of Directors.

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      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 and Director
	/s/ TIMOTHY S. MANNEY
	Timothy S. Manney
	Executive Vice President of Finance and
	Administration, Treasurer and Director
	(Principal Financial and
	Accounting Officer)

Dated: November 15, 1999

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